Sieyuan Electric Co., Ltd.'s (SZSE:002028) Popularity With Investors Is Under Threat From Overpricing

With a price-to-earnings (or "P/E") ratio of 33.4x Sieyuan Electric Co., Ltd. (SZSE:002028) may be sending bearish signals at the moment, given that almost half of all companies in China have P/E ratios under 30x and even P/E's lower than 19x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's superior to most other companies of late, Sieyuan Electric has been doing relatively well. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Sieyuan Electric

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

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

Taking a look back first, we see that the company grew earnings per share by an impressive 26% last year. The strong recent performance means it was also able to grow EPS by 62% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 34% during the coming year according to the eleven analysts following the company. Meanwhile, the rest of the market is forecast to expand by 36%, which is not materially different.

In light of this, it's curious that Sieyuan Electric's P/E sits above the majority of other companies. 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.

What We Can Learn From Sieyuan Electric's P/E?

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Sieyuan Electric currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for Sieyuan Electric with six simple checks on some of these key factors.

Of course, you might also be able to find a better stock than Sieyuan Electric. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.