When close to half the companies in China have price-to-earnings ratios (or "P/E's") below 27x, you may consider ShenZhen QiangRui Precision Technology Co., Ltd. (SZSE:301128) as a stock to avoid entirely with its 56x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.
With earnings growth that's exceedingly strong of late, ShenZhen QiangRui Precision Technology has been doing very well. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, 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.
SZSE:301128 Price to Earnings Ratio vs Industry July 25th 2024 Although there are no analyst estimates available for ShenZhen QiangRui Precision Technology, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.
Is There Enough Growth For ShenZhen QiangRui Precision Technology?
The only time you'd be truly comfortable seeing a P/E as steep as ShenZhen QiangRui Precision Technology's is when the company's growth is on track to outshine the market decidedly.
If we review the last year of earnings growth, the company posted a terrific increase of 40%. However, this wasn't enough as the latest three year period has seen a very unpleasant 19% drop in EPS in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.
Comparing that to the market, which is predicted to deliver 36% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.
With this information, we find it concerning that ShenZhen QiangRui Precision Technology is trading at a P/E higher than the market. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.
What We Can Learn From ShenZhen QiangRui Precision Technology'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.
Our examination of ShenZhen QiangRui Precision Technology 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. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.
It is also worth noting that we have found 4 warning signs for ShenZhen QiangRui Precision Technology (2 don't sit too well with us!) that you need to take into consideration.
If you're unsure about the strength of ShenZhen QiangRui Precision Technology'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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Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com