What Shenzhen Sine Electric Co.,Ltd.'s (SHSE:688395) 37% Share Price Gain Is Not Telling You

The Shenzhen Sine Electric Co.,Ltd. (SHSE:688395) share price has done very well over the last month, posting an excellent gain of 37%. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 26% over that time.

After such a large jump in price, given around half the companies in China have price-to-earnings ratios (or "P/E's") below 33x, you may consider Shenzhen Sine ElectricLtd as a stock to potentially avoid with its 38.3x P/E ratio. 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.

As an illustration, earnings have deteriorated at Shenzhen Sine ElectricLtd over the last year, which is not ideal at all. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Shenzhen Sine ElectricLtd

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Shenzhen Sine ElectricLtd will help you shine a light on its historical performance.

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

Shenzhen Sine ElectricLtd'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 21%. The last three years don't look nice either as the company has shrunk EPS by 59% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 37% shows it's an unpleasant look.

In light of this, it's alarming that Shenzhen Sine ElectricLtd'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.

What We Can Learn From Shenzhen Sine ElectricLtd's P/E?

Shenzhen Sine ElectricLtd shares have received a push in the right direction, but its P/E is elevated too. 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 Shenzhen Sine ElectricLtd revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely 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.

Plus, you should also learn about these 3 warning signs we've spotted with Shenzhen Sine ElectricLtd (including 1 which is concerning).

If you're unsure about the strength of Shenzhen Sine ElectricLtd'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.