Earnings Tell The Story For Sanhe Tongfei Refrigeration Co., Ltd. (SZSE:300990) As Its Stock Soars 33%

Sanhe Tongfei Refrigeration Co., Ltd. (SZSE:300990) shares have continued their recent momentum with a 33% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 64% in the last year.

After such a large jump in price, Sanhe Tongfei Refrigeration may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 79.9x, since almost half of all companies in China have P/E ratios under 38x and even P/E's lower than 21x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Recent times haven't been advantageous for Sanhe Tongfei Refrigeration 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 Sanhe Tongfei Refrigeration

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

In order to justify its P/E ratio, Sanhe Tongfei Refrigeration would need to produce outstanding growth well in excess of the market.

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 40%. This means it has also seen a slide in earnings over the longer-term as EPS is down 29% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 153% during the coming year according to the three analysts following the company. With the market only predicted to deliver 37%, the company is positioned for a stronger earnings result.

With this information, we can see why Sanhe Tongfei Refrigeration 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.

What We Can Learn From Sanhe Tongfei Refrigeration's P/E?

The strong share price surge has got Sanhe Tongfei Refrigeration's P/E rushing to great heights as well. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Sanhe Tongfei Refrigeration 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.

There are also other vital risk factors to consider before investing and we've discovered 3 warning signs for Sanhe Tongfei Refrigeration that you should be aware of.

You might be able to find a better investment than Sanhe Tongfei Refrigeration. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.