Xi'an Sinofuse Electric Co., Ltd. (SZSE:301031) Not Flying Under The Radar

Xi'an Sinofuse Electric Co., Ltd.'s (SZSE:301031) price-to-earnings (or "P/E") ratio of 49x 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 29x and even P/E's below 18x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

While the market has experienced earnings growth lately, Xi'an Sinofuse Electric's earnings have gone into reverse gear, which is not great. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Xi'an Sinofuse Electric

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Xi'an Sinofuse Electric.

Does Growth Match The High P/E?

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 27% decrease to the company's bottom line. That put a dampener on the good run it was having over the longer-term as its three-year EPS growth is still a noteworthy 16% in total. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 53% each year as estimated by the six analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 25% each year, 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. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Xi'an Sinofuse Electric's P/E

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

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. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

Before you take the next step, you should know about the 3 warning signs for Xi'an Sinofuse Electric (1 is significant!) that we have uncovered.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.

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