Those holding Chengdu Spaceon Electronics Co., Ltd. (SZSE:002935) shares would be relieved that the share price has rebounded 28% 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.
Since its price has surged higher, Chengdu Spaceon Electronics' price-to-earnings (or "P/E") ratio of 66.1x 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 27x and even P/E's below 16x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.
While the market has experienced earnings growth lately, Chengdu Spaceon Electronics' earnings have gone into reverse gear, which is not great. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.
What Are Growth Metrics Telling Us About The High P/E?
There's an inherent assumption that a company should far outperform the market for P/E ratios like Chengdu Spaceon Electronics' to be considered reasonable.
Retrospectively, the last year delivered a frustrating 23% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 15% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.
Shifting to the future, estimates from the only analyst covering the company suggest earnings should grow by 30% per annum over the next three years. Meanwhile, the rest of the market is forecast to only expand by 24% per annum, which is noticeably less attractive.
In light of this, it's understandable that Chengdu Spaceon Electronics' P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.
The Final Word
The strong share price surge has got Chengdu Spaceon Electronics' P/E rushing to great heights as well. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
We've established that Chengdu Spaceon Electronics 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.
Before you take the next step, you should know about the 1 warning sign for Chengdu Spaceon Electronics that we have uncovered.
If you're unsure about the strength of Chengdu Spaceon Electronics' 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.
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