Shenzhen Ridge Engineering Consulting Co., Ltd.'s (SZSE:300977) price-to-earnings (or "P/E") ratio of 55x might make it look like a strong 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. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.
Recent times have been pleasing for Shenzhen Ridge Engineering Consulting as its earnings have risen in spite of the market's earnings going into reverse. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. If not, then existing shareholders might be a little nervous about the viability of the share price.
See our latest analysis for Shenzhen Ridge Engineering Consulting
How Is Shenzhen Ridge Engineering Consulting's Growth Trending?
In order to justify its P/E ratio, Shenzhen Ridge Engineering Consulting would need to produce outstanding growth well in excess of the market.
Retrospectively, the last year delivered an exceptional 16% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen a very unpleasant 71% drop in EPS in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.
Looking ahead now, EPS is anticipated to climb by 122% during the coming year according to the two analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 43%, which is noticeably less attractive.
With this information, we can see why Shenzhen Ridge Engineering Consulting 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 Bottom Line On Shenzhen Ridge Engineering Consulting's P/E
Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.
We've established that Shenzhen Ridge Engineering Consulting 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. It's hard to see the share price falling strongly in the near future under these circumstances.
Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for Shenzhen Ridge Engineering Consulting with six simple checks on some of these key factors.
If these risks are making you reconsider your opinion on Shenzhen Ridge Engineering Consulting, explore our interactive list of high quality stocks to get an idea of what else is out there.
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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.