Investors Appear Satisfied With Xiangtan Electric Manufacturing Co. Ltd.'s (SHSE:600416) Prospects As Shares Rocket 29%

Those holding Xiangtan Electric Manufacturing Co. Ltd. (SHSE:600416) shares would be relieved that the share price has rebounded 29% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 43% over that time.

Following the firm bounce in price, Xiangtan Electric Manufacturing may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 51.3x, since almost half of all companies in China have P/E ratios under 29x and even P/E's lower than 18x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Recent times have been pleasing for Xiangtan Electric Manufacturing as its earnings have risen in spite of the market's earnings going into reverse. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Xiangtan Electric Manufacturing

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Xiangtan Electric Manufacturing.

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

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

If we review the last year of earnings growth, the company posted a terrific increase of 64%. Still, EPS has barely risen at all from three years ago in total, which is not ideal. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Turning to the outlook, the next year should generate growth of 59% as estimated by the sole analyst watching the company. That's shaping up to be materially higher than the 41% growth forecast for the broader market.

In light of this, it's understandable that Xiangtan Electric Manufacturing's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Xiangtan Electric Manufacturing's P/E

The strong share price surge has got Xiangtan Electric Manufacturing's P/E rushing to great heights as well. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Xiangtan Electric Manufacturing'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.

You should always think about risks. Case in point, we've spotted 1 warning sign for Xiangtan Electric Manufacturing you should be aware of.

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.