What You Can Learn From Dajin Heavy Industry Co.,Ltd.'s (SZSE:002487) P/E

With a price-to-earnings (or "P/E") ratio of 30.1x Dajin Heavy Industry Co.,Ltd. (SZSE:002487) may be sending bearish signals at the moment, given that almost half of all companies in China have P/E ratios under 27x and even P/E's lower than 16x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Dajin Heavy IndustryLtd hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Dajin Heavy IndustryLtd

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

Does Growth Match The High P/E?

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

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 22%. As a result, earnings from three years ago have also fallen 29% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 42% per year during the coming three years according to the nine analysts following the company. That's shaping up to be materially higher than the 24% each year growth forecast for the broader market.

In light of this, it's understandable that Dajin Heavy IndustryLtd's P/E sits above the majority of other companies. 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.

We've established that Dajin Heavy IndustryLtd maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. 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.

Plus, you should also learn about this 1 warning sign we've spotted with Dajin Heavy IndustryLtd.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and 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.