Unpleasant Surprises Could Be In Store For Shanghai Vico Precision Mold &Plastics Co,. Ltd.'s (SZSE:301499) Shares

When close to half the companies in China have price-to-earnings ratios (or "P/E's") below 32x, you may consider Shanghai Vico Precision Mold &Plastics Co,. Ltd. (SZSE:301499) as a stock to avoid entirely with its 59.8x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

As an illustration, earnings have deteriorated at Shanghai Vico Precision Mold &Plastics Co over the last year, which is not ideal at all. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Shanghai Vico Precision Mold &Plastics Co

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 Shanghai Vico Precision Mold &Plastics Co's earnings, revenue and cash flow.

Is There Enough Growth For Shanghai Vico Precision Mold &Plastics Co?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Shanghai Vico Precision Mold &Plastics Co's 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 25%. As a result, earnings from three years ago have also fallen 24% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Comparing that to the market, which is predicted to deliver 38% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

In light of this, it's alarming that Shanghai Vico Precision Mold &Plastics Co's P/E sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

The Key Takeaway

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.

We've established that Shanghai Vico Precision Mold &Plastics Co 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. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

You always need to take note of risks, for example - Shanghai Vico Precision Mold &Plastics Co has 2 warning signs we think you should be aware of.

If you're unsure about the strength of Shanghai Vico Precision Mold &Plastics Co's 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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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.