There's Reason For Concern Over Dalian Demaishi Precision Technology Co., Ltd.'s (SZSE:301007) Price

When close to half the companies in China have price-to-earnings ratios (or "P/E's") below 33x, you may consider Dalian Demaishi Precision Technology Co., Ltd. (SZSE:301007) as a stock to potentially avoid with its 41.9x P/E ratio. 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.

Earnings have risen firmly for Dalian Demaishi Precision Technology recently, which is pleasing to see. It might be that many expect the respectable earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders may be a little nervous about the viability of the share price.

View our latest analysis for Dalian Demaishi Precision Technology

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Dalian Demaishi Precision Technology's earnings, revenue and cash flow.

What Are Growth Metrics Telling Us About The High P/E?

The only time you'd be truly comfortable seeing a P/E as high as Dalian Demaishi Precision Technology's is when the company's growth is on track to outshine the market.

If we review the last year of earnings growth, the company posted a terrific increase of 16%. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 36% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Comparing that to the market, which is predicted to deliver 37% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

With this information, we find it concerning that Dalian Demaishi Precision Technology is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. 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 Key Takeaway

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 Dalian Demaishi Precision Technology currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Plus, you should also learn about these 2 warning signs we've spotted with Dalian Demaishi Precision Technology (including 1 which doesn't sit too well with us).

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.