Shandong Tengda Fasten Tech. Co., Ltd.'s (SZSE:001379) Share Price Not Quite Adding Up

Shandong Tengda Fasten Tech. Co., Ltd.'s (SZSE:001379) price-to-earnings (or "P/E") ratio of 69.9x might make it look like a strong sell right now compared to the market in China, where around half of the companies have P/E ratios below 39x and even P/E's below 22x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

For example, consider that Shandong Tengda Fasten Tech's financial performance has been poor lately as its earnings have been in decline. 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.

View our latest analysis for Shandong Tengda Fasten Tech

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Shandong Tengda Fasten Tech's earnings, revenue and cash flow.

Is There Enough Growth For Shandong Tengda Fasten Tech?

The only time you'd be truly comfortable seeing a P/E as steep as Shandong Tengda Fasten Tech's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered a frustrating 43% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 52% in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Comparing that to the market, which is predicted to deliver 37% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

With this information, we find it concerning that Shandong Tengda Fasten Tech is trading at a P/E higher than the market. 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 Bottom Line On Shandong Tengda Fasten Tech's P/E

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Shandong Tengda Fasten Tech 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.

Before you take the next step, you should know about the 1 warning sign for Shandong Tengda Fasten Tech that we have uncovered.

If you're unsure about the strength of Shandong Tengda Fasten Tech'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.