What You Can Learn From Sanhe Tongfei Refrigeration Co., Ltd.'s (SZSE:300990) P/E

When close to half the companies in China have price-to-earnings ratios (or "P/E's") below 31x, you may consider Sanhe Tongfei Refrigeration Co., Ltd. (SZSE:300990) as a stock to potentially avoid with its 36.6x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

Sanhe Tongfei Refrigeration certainly has been doing a good job lately as it's been growing earnings more than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. 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

Want the full picture on analyst estimates for the company? Then our free report on Sanhe Tongfei Refrigeration will help you uncover what's on the horizon.

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.

If we review the last year of earnings growth, the company posted a terrific increase of 16%. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 16% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 37% per annum during the coming three years according to the two analysts following the company. That's shaping up to be materially higher than the 25% per annum growth forecast for the broader market.

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

The Final Word

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. Unless these conditions change, they will continue to provide strong support to the share price.

You need to take note of risks, for example - Sanhe Tongfei Refrigeration has 4 warning signs (and 1 which can't be ignored) we think you should know about.

If you're unsure about the strength of Sanhe Tongfei Refrigeration's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.