With a price-to-earnings (or "P/E") ratio of 57.3x Wenzhou Yihua Connector Co., Ltd. (SZSE:002897) may be sending very bearish signals at the moment, given that almost half of all companies in China have P/E ratios under 34x and even P/E's lower than 19x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Wenzhou Yihua Connector has been struggling lately as its earnings have declined faster than most other companies. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. If not, then existing shareholders may be very nervous about the viability of the share price.

Check out our latest analysis for Wenzhou Yihua Connector

Does Growth Match The High P/E?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Wenzhou Yihua Connector's to be considered reasonable.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 57%. The last three years don't look nice either as the company has shrunk EPS by 34% in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Shifting to the future, estimates from the two analysts covering the company suggest earnings should grow by 242% over the next year. With the market only predicted to deliver 44%, the company is positioned for a stronger earnings result.

With this information, we can see why Wenzhou Yihua Connector is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Key Takeaway

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Wenzhou Yihua Connector maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

Before you take the next step, you should know about the 4 warning signs for Wenzhou Yihua Connector (1 is a bit concerning!) that we have uncovered.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.