When close to half the companies in China have price-to-earnings ratios (or "P/E's") below 35x, you may consider Changzheng Engineering Technology Co.,Ltd (SHSE:603698) as a stock to potentially avoid with its 44.5x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.
Recent times have been pleasing for Changzheng Engineering TechnologyLtd as its earnings have risen in spite of the market's earnings going into reverse. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors' willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
See our latest analysis for Changzheng Engineering TechnologyLtd
What Are Growth Metrics Telling Us About The High P/E?
In order to justify its P/E ratio, Changzheng Engineering TechnologyLtd would need to produce impressive growth in excess of the market.
If we review the last year of earnings growth, the company posted a worthy increase of 6.3%. The latest three year period has also seen an excellent 36% overall rise in EPS, aided somewhat by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
Shifting to the future, estimates from the dual analysts covering the company suggest earnings should grow by 50% over the next year. With the market only predicted to deliver 43%, the company is positioned for a stronger earnings result.
In light of this, it's understandable that Changzheng Engineering TechnologyLtd's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
What We Can Learn From Changzheng Engineering TechnologyLtd's P/E?
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.
As we suspected, our examination of Changzheng Engineering TechnologyLtd's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.
It is also worth noting that we have found 1 warning sign for Changzheng Engineering TechnologyLtd that you need to take into consideration.
If you're unsure about the strength of Changzheng Engineering TechnologyLtd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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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.