Anhui Wanwei Updated High-Tech Material Industry Co.,Ltd's (SHSE:600063) price-to-earnings (or "P/E") ratio of 66.2x 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 35x and even P/E's below 20x 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.

Anhui Wanwei Updated High-Tech Material IndustryLtd has been struggling lately as its earnings have declined faster than most other companies. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Does Growth Match The High P/E?

The only time you'd be truly comfortable seeing a P/E as steep as Anhui Wanwei Updated High-Tech Material IndustryLtd's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered a frustrating 73% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 86% in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Shifting to the future, estimates from the two analysts covering the company suggest earnings should grow by 371% over the next year. Meanwhile, the rest of the market is forecast to only expand by 38%, which is noticeably less attractive.

With this information, we can see why Anhui Wanwei Updated High-Tech Material IndustryLtd is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

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.

As we suspected, our examination of Anhui Wanwei Updated High-Tech Material IndustryLtd'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.

Before you settle on your opinion, we've discovered 3 warning signs for Anhui Wanwei Updated High-Tech Material IndustryLtd that you should be aware of.

Of course, you might also be able to find a better stock than Anhui Wanwei Updated High-Tech Material IndustryLtd. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.