Those holding SF Oilless Bearing Group Co., Ltd. (SZSE:300817) shares would be relieved that the share price has rebounded 29% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 12% over that time.
After such a large jump in price, given around half the companies in China have price-to-earnings ratios (or "P/E's") below 31x, you may consider SF Oilless Bearing Group as a stock to potentially avoid with its 36x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.
As an illustration, earnings have deteriorated at SF Oilless Bearing Group over the last year, which is not ideal at all. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.
How Is SF Oilless Bearing Group's Growth Trending?
There's an inherent assumption that a company should outperform the market for P/E ratios like SF Oilless Bearing Group's to be considered reasonable.
Retrospectively, the last year delivered a frustrating 13% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 4.3% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.
Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 41% shows it's an unpleasant look.
With this information, we find it concerning that SF Oilless Bearing Group is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.
The Bottom Line On SF Oilless Bearing Group's P/E
SF Oilless Bearing Group's P/E is getting right up there since its shares have risen strongly. 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.
Our examination of SF Oilless Bearing Group revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.
You should always think about risks. Case in point, we've spotted 3 warning signs for SF Oilless Bearing Group you should be aware of, and 1 of them doesn't sit too well with us.
You might be able to find a better investment than SF Oilless Bearing Group. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).
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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.
