After Leaping 32% Far East Smarter Energy Co., Ltd. (SHSE:600869) Shares Are Not Flying Under The Radar

Far East Smarter Energy Co., Ltd. (SHSE:600869) shareholders are no doubt pleased to see that the share price has bounced 32% in the last month, although it is still struggling to make up recently lost ground. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 30% over that time.

Since its price has surged higher, Far East Smarter Energy's price-to-earnings (or "P/E") ratio of 35.1x might make it look like a sell right now compared to the market in China, where around half of the companies have P/E ratios below 27x and even P/E's below 16x are quite common. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

While the market has experienced earnings growth lately, Far East Smarter Energy's earnings have gone into reverse gear, which is not great. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.

See our latest analysis for Far East Smarter Energy

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Far East Smarter Energy.

Is There Enough Growth For Far East Smarter Energy?

The only time you'd be truly comfortable seeing a P/E as high as Far East Smarter Energy's is when the company's growth is on track to outshine the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 62%. Unfortunately, that's brought it right back to where it started three years ago with EPS growth being virtually non-existent overall during that time. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Looking ahead now, EPS is anticipated to climb by 81% per annum during the coming three years according to the lone analyst following the company. That's shaping up to be materially higher than the 24% each year growth forecast for the broader market.

With this information, we can see why Far East Smarter Energy 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.

What We Can Learn From Far East Smarter Energy's P/E?

Far East Smarter Energy's P/E is getting right up there since its shares have risen strongly. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Far East Smarter Energy'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.

There are also other vital risk factors to consider and we've discovered 5 warning signs for Far East Smarter Energy (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

If you're unsure about the strength of Far East Smarter Energy'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.