Why Investors Shouldn't Be Surprised By Xiangtan Electric Manufacturing Co. Ltd.'s (SHSE:600416) P/E

When close to half the companies in China have price-to-earnings ratios (or "P/E's") below 28x, you may consider Xiangtan Electric Manufacturing Co. Ltd. (SHSE:600416) as a stock to avoid entirely with its 50.6x 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.

Xiangtan Electric Manufacturing could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Xiangtan Electric Manufacturing

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Is There Enough Growth For Xiangtan Electric Manufacturing?

The only time you'd be truly comfortable seeing a P/E as steep as Xiangtan Electric Manufacturing's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered a frustrating 25% decrease to the company's bottom line. Regardless, EPS has managed to lift by a handy 6.3% in aggregate from three years ago, thanks to the earlier period of growth. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of earnings growth.

Shifting to the future, estimates from the only analyst covering the company suggest earnings should grow by 150% over the next year. With the market only predicted to deliver 36%, the company is positioned for a stronger earnings result.

With this information, we can see why Xiangtan Electric Manufacturing is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Xiangtan Electric Manufacturing maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. 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.

Many other vital risk factors can be found on the company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Xiangtan Electric Manufacturing with six simple checks.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com