China Aerospace Times Electronics CO., LTD.'s (SHSE:600879) 28% Price Boost Is Out Of Tune With Earnings

China Aerospace Times Electronics CO., LTD. (SHSE:600879) shares have continued their recent momentum with a 28% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 29%.

Since its price has surged higher, China Aerospace Times Electronics may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 59.8x, since almost half of all companies in China have P/E ratios under 36x and even P/E's lower than 21x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Recent times haven't been advantageous for China Aerospace Times Electronics as its earnings have been falling quicker than most other companies. It might be that many expect the dismal earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be very nervous about the viability of the share price.

Check out our latest analysis for China Aerospace Times Electronics

If you'd like to see what analysts are forecasting going forward, you should check out our free report on China Aerospace Times Electronics.

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

China Aerospace Times Electronics' P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 21%. The last three years don't look nice either as the company has shrunk EPS by 17% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the six analysts covering the company suggest earnings should grow by 43% over the next year. With the market predicted to deliver 41% growth , the company is positioned for a comparable earnings result.

In light of this, it's curious that China Aerospace Times Electronics' P/E sits above the majority of other companies. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

The Final Word

Shares in China Aerospace Times Electronics have built up some good momentum lately, which has really inflated its P/E. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that China Aerospace Times Electronics currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for China Aerospace Times Electronics with six simple checks will allow you to discover any risks that could be an issue.

If these risks are making you reconsider your opinion on China Aerospace Times Electronics, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.