Why Investors Shouldn't Be Surprised By Xi'an Sinofuse Electric Co., Ltd.'s (SZSE:301031) 51% Share Price Surge

Xi'an Sinofuse Electric Co., Ltd. (SZSE:301031) shareholders have had their patience rewarded with a 51% share price jump in the last month. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 3.5% in the last twelve months.

Following the firm bounce in price, Xi'an Sinofuse Electric may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 58.3x, since almost half of all companies in China have P/E ratios under 33x and even P/E's lower than 20x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Xi'an Sinofuse Electric has been struggling lately as its earnings have declined faster 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. If not, then existing shareholders may be very nervous about the viability of the share price.

See our latest analysis for Xi'an Sinofuse Electric

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How Is Xi'an Sinofuse Electric's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as steep as Xi'an Sinofuse Electric's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered a frustrating 14% decrease to the company's bottom line. Regardless, EPS has managed to lift by a handy 26% in aggregate from three years ago, thanks to the earlier period of growth. So we can start by confirming that the company has generally done a good job of growing earnings over that time, even though it had some hiccups along the way.

Shifting to the future, estimates from the seven analysts covering the company suggest earnings should grow by 49% per annum over the next three years. Meanwhile, the rest of the market is forecast to only expand by 19% per annum, which is noticeably less attractive.

In light of this, it's understandable that Xi'an Sinofuse Electric'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 Xi'an Sinofuse Electric's P/E?

Shares in Xi'an Sinofuse Electric have built up some good momentum lately, which has really inflated its P/E. 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 Xi'an Sinofuse Electric 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.

Plus, you should also learn about these 2 warning signs we've spotted with Xi'an Sinofuse Electric.

Of course, you might also be able to find a better stock than Xi'an Sinofuse Electric. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.