Investor Optimism Abounds Shandong Golden Empire Precision Machinery Technology Co., Ltd. (SHSE:603270) But Growth Is Lacking

With a price-to-earnings (or "P/E") ratio of 42.9x Shandong Golden Empire Precision Machinery Technology Co., Ltd. (SHSE:603270) may be sending bearish signals at the moment, given that almost half of all companies in China have P/E ratios under 31x and even P/E's lower than 19x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

For instance, Shandong Golden Empire Precision Machinery Technology's receding earnings in recent times would have to be some food for thought. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Shandong Golden Empire Precision Machinery Technology

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Shandong Golden Empire Precision Machinery Technology will help you shine a light on its historical performance.

Does Growth Match The High P/E?

Shandong Golden Empire Precision Machinery Technology's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 3.9%. The last three years don't look nice either as the company has shrunk EPS by 18% in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 38% shows it's an unpleasant look.

In light of this, it's alarming that Shandong Golden Empire Precision Machinery Technology's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Key Takeaway

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 Shandong Golden Empire Precision Machinery Technology currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Shandong Golden Empire Precision Machinery Technology that you should be aware of.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.