ShenZhen QiangRui Precision Technology Co., Ltd.'s (SZSE:301128) Shareholders Might Be Looking For Exit

With a price-to-earnings (or "P/E") ratio of 46x ShenZhen QiangRui Precision Technology Co., Ltd. (SZSE:301128) may be sending bearish signals at the moment, given that almost half of all companies in China have P/E ratios under 34x and even P/E's lower than 20x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Recent times have been quite advantageous for ShenZhen QiangRui Precision Technology as its earnings have been rising very briskly. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for ShenZhen QiangRui Precision Technology

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on ShenZhen QiangRui Precision Technology's earnings, revenue and cash flow.

Is There Enough Growth For ShenZhen QiangRui Precision Technology?

In order to justify its P/E ratio, ShenZhen QiangRui Precision Technology would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered an exceptional 139% gain to the company's bottom line. Pleasingly, EPS has also lifted 31% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

This is in contrast to the rest of the market, which is expected to grow by 38% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's alarming that ShenZhen QiangRui Precision Technology's P/E sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

What We Can Learn From ShenZhen QiangRui Precision Technology's P/E?

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 ShenZhen QiangRui Precision Technology currently trades on a much higher than expected P/E since its recent three-year growth is lower than the wider market forecast. Right now we are increasingly uncomfortable with the high P/E as this earnings performance isn't likely to support such positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

There are also other vital risk factors to consider and we've discovered 2 warning signs for ShenZhen QiangRui Precision Technology (1 shouldn't be ignored!) that you should be aware of before investing here.

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.