What You Can Learn From Jiangsu Rainbow Heavy Industries Co., Ltd.'s (SZSE:002483) P/E

When close to half the companies in China have price-to-earnings ratios (or "P/E's") below 29x, you may consider Jiangsu Rainbow Heavy Industries Co., Ltd. (SZSE:002483) as a stock to avoid entirely with its 52.4x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

With earnings growth that's superior to most other companies of late, Jiangsu Rainbow Heavy Industries 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.

Check out our latest analysis for Jiangsu Rainbow Heavy Industries

Keen to find out how analysts think Jiangsu Rainbow Heavy Industries' future stacks up against the industry? In that case, our free report is a great place to start.

How Is Jiangsu Rainbow Heavy Industries' Growth Trending?

The only time you'd be truly comfortable seeing a P/E as steep as Jiangsu Rainbow Heavy Industries' is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered an exceptional 68% gain to the company's bottom line. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 75% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 96% per annum as estimated by the three analysts watching the company. That's shaping up to be materially higher than the 25% per year growth forecast for the broader market.

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 Key Takeaway

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.

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.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Jiangsu Rainbow Heavy Industries that you should be aware of.

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.