Getting In Cheap On Jiangsu Rainbow Heavy Industries Co., Ltd. (SZSE:002483) Might Be Difficult

Jiangsu Rainbow Heavy Industries Co., Ltd.'s (SZSE:002483) price-to-earnings (or "P/E") ratio of 59.7x 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 34x and even P/E's below 20x 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 so lofty.

Recent times haven't been advantageous for Jiangsu Rainbow Heavy Industries as its earnings have been falling quicker than most other companies. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Jiangsu Rainbow Heavy Industries

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Jiangsu Rainbow Heavy Industries.

How Is Jiangsu Rainbow Heavy Industries' Growth Trending?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Jiangsu Rainbow Heavy Industries' to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 12%. This means it has also seen a slide in earnings over the longer-term as EPS is down 74% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next year should generate growth of 397% as estimated by the lone analyst watching the company. Meanwhile, the rest of the market is forecast to only expand by 38%, which is noticeably less attractive.

With this information, we can see why Jiangsu Rainbow Heavy Industries is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Jiangsu Rainbow Heavy Industries' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Jiangsu Rainbow Heavy Industries that you need to be mindful of.

If you're unsure about the strength of Jiangsu Rainbow Heavy Industries' 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.