When close to half the companies in China have price-to-earnings ratios (or "P/E's") below 26x, you may consider Qingdao TGOOD Electric Co., Ltd. (SZSE:300001) as a stock to potentially avoid with its 31.4x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Qingdao TGOOD Electric has been doing quite well of late. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors' willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.

How Is Qingdao TGOOD Electric's Growth Trending?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 88% last year. The strong recent performance means it was also able to grow EPS by 197% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 28% per annum as estimated by the twelve analysts watching the company. That's shaping up to be materially higher than the 19% each year growth forecast for the broader market.

In light of this, it's understandable that Qingdao TGOOD Electric's 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

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of Qingdao TGOOD Electric's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for Qingdao TGOOD Electric with six simple checks will allow you to discover any risks that could be an issue.

You might be able to find a better investment than Qingdao TGOOD Electric. 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.