Some Shareholders Feeling Restless Over Sichuan Tianwei Electronic Co.,Ltd.'s (SHSE:688511) P/E Ratio

When close to half the companies in China have price-to-earnings ratios (or "P/E's") below 30x, you may consider Sichuan Tianwei Electronic Co.,Ltd. (SHSE:688511) as a stock to potentially avoid with its 38.2x 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.

Earnings have risen firmly for Sichuan Tianwei ElectronicLtd recently, which is pleasing to see. One possibility is that the P/E is high because investors think this respectable earnings growth will be enough to outperform the broader market in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.

View our latest analysis for Sichuan Tianwei ElectronicLtd

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

How Is Sichuan Tianwei ElectronicLtd's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as high as Sichuan Tianwei ElectronicLtd's is when the company's growth is on track to outshine the market.

Retrospectively, the last year delivered a decent 8.2% gain to the company's bottom line. Ultimately though, it couldn't turn around the poor performance of the prior period, with EPS shrinking 75% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

In contrast to the company, the rest of the market is expected to grow by 38% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

In light of this, it's alarming that Sichuan Tianwei ElectronicLtd's P/E sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. 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 Final Word

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 Sichuan Tianwei ElectronicLtd 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. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Sichuan Tianwei ElectronicLtd (at least 2 which are potentially serious), and understanding them should be part of your investment process.

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.