Yantai Eddie Precision Machinery Co., Ltd.'s (SHSE:603638) price-to-earnings (or "P/E") ratio of 39.3x might make it look like a sell right now compared to the market in China, where around half of the companies have P/E ratios below 31x and even P/E's below 19x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.
Recent times have been pleasing for Yantai Eddie Precision Machinery 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. If not, then existing shareholders might be a little nervous about the viability of the share price.
Check out our latest analysis for Yantai Eddie Precision Machinery
SHSE:603638 Price to Earnings Ratio vs Industry January 21st 2024 If you'd like to see what analysts are forecasting going forward, you should check out our free report on Yantai Eddie Precision Machinery.
Is There Enough Growth For Yantai Eddie Precision Machinery?
There's an inherent assumption that a company should outperform the market for P/E ratios like Yantai Eddie Precision Machinery's to be considered reasonable.
Taking a look back first, we see that the company grew earnings per share by an impressive 24% last year. Still, incredibly EPS has fallen 41% in total from three years ago, which is quite disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.
Turning to the outlook, the next year should generate growth of 11% as estimated by the five analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 43%, which is noticeably more attractive.
With this information, we find it concerning that Yantai Eddie Precision Machinery is trading at a P/E higher than the market. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.
The Final Word
While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.
Our examination of Yantai Eddie Precision Machinery's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.
Before you take the next step, you should know about the 1 warning sign for Yantai Eddie Precision Machinery that we have uncovered.
If you're unsure about the strength of Yantai Eddie Precision Machinery'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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