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

Jiangsu Shemar Electric Co.,Ltd's (SHSE:603530) price-to-earnings (or "P/E") ratio of 42.3x 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 38x and even P/E's below 21x are quite common. 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.

Recent times have been pleasing for Jiangsu Shemar ElectricLtd as its earnings have risen in spite of the market's earnings going into reverse. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. If not, then existing shareholders might be a little nervous about the viability of the share price.

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How Is Jiangsu Shemar ElectricLtd's Growth Trending?

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 158% last year. Pleasingly, EPS has also lifted 144% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to climb by 35% during the coming year according to the only analyst following the company. That's shaping up to be similar to the 37% growth forecast for the broader market.

With this information, we find it interesting that Jiangsu Shemar ElectricLtd is trading at a high P/E compared to the market. 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 Bottom Line On Jiangsu Shemar ElectricLtd's P/E

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

Our examination of Jiangsu Shemar ElectricLtd's analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve, it's 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.

If these risks are making you reconsider your opinion on Jiangsu Shemar ElectricLtd, 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.