Shareholders Should Be Pleased With AVIC Shenyang Aircraft Company Limited's (SHSE:600760) Price

With a price-to-earnings (or "P/E") ratio of 53.7x AVIC Shenyang Aircraft Company Limited (SHSE:600760) may be sending bearish signals at the moment, given that almost half of all companies in China have P/E ratios under 36x and even P/E's lower than 20x are not unusual. 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.

With earnings that are retreating more than the market's of late, AVIC Shenyang Aircraft has been very sluggish. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for AVIC Shenyang Aircraft

Want the full picture on analyst estimates for the company? Then our free report on AVIC Shenyang Aircraft will help you uncover what's on the horizon.

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

In order to justify its P/E ratio, AVIC Shenyang Aircraft would need to produce impressive growth in excess of the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 17%. Still, the latest three year period has seen an excellent 39% overall rise in EPS, in spite of its unsatisfying short-term performance. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Shifting to the future, estimates from the eight analysts covering the company suggest earnings should grow by 77% over the next year. That's shaping up to be materially higher than the 38% growth forecast for the broader market.

In light of this, it's understandable that AVIC Shenyang Aircraft'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 Key Takeaway

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 AVIC Shenyang Aircraft's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

And what about other risks? Every company has them, and we've spotted 2 warning signs for AVIC Shenyang Aircraft (of which 1 is a bit concerning!) you should know about.

You might be able to find a better investment than AVIC Shenyang Aircraft. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.