Investor Optimism Abounds Taiyuan Heavy Industry Co., Ltd. (SHSE:600169) But Growth Is Lacking

When close to half the companies in China have price-to-earnings ratios (or "P/E's") below 35x, you may consider Taiyuan Heavy Industry Co., Ltd. (SHSE:600169) as a stock to avoid entirely with its 53.4x 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 so lofty.

For example, consider that Taiyuan Heavy Industry's financial performance has been poor lately as its earnings have been in decline. 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. If not, then existing shareholders may be quite nervous about the viability of the share price.

View our latest analysis for Taiyuan Heavy Industry

Although there are no analyst estimates available for Taiyuan Heavy Industry, 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?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Taiyuan Heavy Industry's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 35% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 75% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

In contrast to the company, the rest of the market is expected to grow by 40% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

In light of this, it's alarming that Taiyuan Heavy Industry's P/E sits above the majority of other companies. 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 Final Word

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.

Our examination of Taiyuan Heavy Industry 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. 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.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Taiyuan Heavy Industry (at least 1 which shouldn't be ignored), and understanding these should be part of your investment process.

If you're unsure about the strength of Taiyuan Heavy Industry'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.