With a price-to-earnings (or "P/E") ratio of 32.9x Western Superconducting Technologies Co., Ltd. (SHSE:688122) may be sending bearish signals at the moment, given that almost half of all companies in China have P/E ratios under 26x and even P/E's lower than 16x are not unusual. 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.

Western Superconducting Technologies hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

How Is Western Superconducting Technologies' Growth Trending?

There's an inherent assumption that a company should outperform the market for P/E ratios like Western Superconducting Technologies' to be considered reasonable.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 39%. Still, the latest three year period has seen an excellent 35% overall rise in EPS, in spite of its unsatisfying short-term performance. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Looking ahead now, EPS is anticipated to climb by 28% per year during the coming three years according to the five analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 23% per annum, which is noticeably less attractive.

With this information, we can see why Western Superconducting Technologies 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 Final Word

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.

As we suspected, our examination of Western Superconducting Technologies' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. 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.

You should always think about risks. Case in point, we've spotted 3 warning signs for Western Superconducting Technologies you should be aware of.

If you're unsure about the strength of Western Superconducting Technologies' 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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