Zhejiang Yonggui Electric Equipment Co., Ltd.'s (SZSE:300351) P/E Is On The Mark

Zhejiang Yonggui Electric Equipment Co., Ltd.'s (SZSE:300351) price-to-earnings (or "P/E") ratio of 52.5x 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 27x and even P/E's below 16x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Zhejiang Yonggui Electric Equipment could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. 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.

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Is There Enough Growth For Zhejiang Yonggui Electric Equipment?

In order to justify its P/E ratio, Zhejiang Yonggui Electric Equipment would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered a frustrating 31% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 2.0% 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 33% per annum as estimated by the sole analyst watching the company. With the market only predicted to deliver 25% per annum, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Zhejiang Yonggui Electric Equipment's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What We Can Learn From Zhejiang Yonggui Electric Equipment'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 Zhejiang Yonggui Electric Equipment 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.

Having said that, be aware Zhejiang Yonggui Electric Equipment is showing 1 warning sign in our investment analysis, you should know about.

If these risks are making you reconsider your opinion on Zhejiang Yonggui Electric Equipment, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.