Some Confidence Is Lacking In Jiangsu Shemar Electric Co.,Ltd's (SHSE:603530) P/E

When close to half the companies in China have price-to-earnings ratios (or "P/E's") below 27x, you may consider Jiangsu Shemar Electric Co.,Ltd (SHSE:603530) as a stock to potentially avoid with its 37.6x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Jiangsu Shemar ElectricLtd certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Jiangsu Shemar ElectricLtd

Although there are no analyst estimates available for Jiangsu Shemar ElectricLtd, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Is There Enough Growth For Jiangsu Shemar ElectricLtd?

There's an inherent assumption that a company should outperform the market for P/E ratios like Jiangsu Shemar ElectricLtd's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 232% last year. The latest three year period has also seen an excellent 83% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Comparing that to the market, which is predicted to deliver 36% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

With this information, we find it concerning that Jiangsu Shemar ElectricLtd is trading at a P/E higher than the market. 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 Bottom Line On Jiangsu Shemar ElectricLtd's P/E

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.

Our examination of Jiangsu Shemar ElectricLtd revealed its three-year earnings trends aren't impacting its high P/E anywhere near as much as we would have predicted, given they look worse than current market expectations. Right now we are increasingly uncomfortable with the high P/E as this earnings performance isn't likely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Before you settle on your opinion, we've discovered 1 warning sign for Jiangsu Shemar ElectricLtd that you should be aware of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on 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.