Getting In Cheap On Sanhe Tongfei Refrigeration Co., Ltd. (SZSE:300990) Might Be Difficult

When close to half the companies in China have price-to-earnings ratios (or "P/E's") below 26x, you may consider Sanhe Tongfei Refrigeration Co., Ltd. (SZSE:300990) as a stock to potentially avoid with its 37.2x P/E ratio. However, the P/E might be 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. It might be that many expect the dismal 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.

Check out our latest analysis for Sanhe Tongfei Refrigeration

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Sanhe Tongfei Refrigeration.

Does Growth Match The High P/E?

The only time you'd be truly comfortable seeing a P/E as high as Sanhe Tongfei Refrigeration's is when the company's growth is on track to outshine the market.

Retrospectively, the last year delivered a frustrating 6.9% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 23% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the three analysts covering the company suggest earnings should grow by 44% per annum over the next three years. Meanwhile, the rest of the market is forecast to only expand by 19% each year, which is noticeably less attractive.

In light of this, it's understandable that Sanhe Tongfei Refrigeration'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

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.

As we suspected, our examination of Sanhe Tongfei Refrigeration's 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. Unless these conditions change, they will continue to provide strong support to the share price.

You should always think about risks. Case in point, we've spotted 3 warning signs for Sanhe Tongfei Refrigeration you should be aware of, and 1 of them is significant.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.