Zhejiang Jinfei Kaida Wheel Co.,Ltd.'s (SZSE:002863) Share Price Could Signal Some Risk

Zhejiang Jinfei Kaida Wheel Co.,Ltd.'s (SZSE:002863) price-to-earnings (or "P/E") ratio of 43.5x might make it look like a sell right now compared to the market in China, where around half of the companies have P/E ratios below 39x and even P/E's below 22x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

For example, consider that Zhejiang Jinfei Kaida WheelLtd's financial performance has been poor lately as its earnings have been in decline. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.

Check out our latest analysis for Zhejiang Jinfei Kaida WheelLtd

Although there are no analyst estimates available for Zhejiang Jinfei Kaida WheelLtd, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Does Growth Match The High P/E?

The only time you'd be truly comfortable seeing a P/E as high as Zhejiang Jinfei Kaida WheelLtd's is when the company's growth is on track to outshine the market.

Retrospectively, the last year delivered a frustrating 44% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 12% in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 37% shows it's an unpleasant look.

With this information, we find it concerning that Zhejiang Jinfei Kaida WheelLtd 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. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

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.

Our examination of Zhejiang Jinfei Kaida WheelLtd 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. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Having said that, be aware Zhejiang Jinfei Kaida WheelLtd is showing 3 warning signs in our investment analysis, and 1 of those shouldn't be ignored.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.