Investors Appear Satisfied With Fujian Yongfu Power Engineering Co.,Ltd.'s (SZSE:300712) Prospects As Shares Rocket 36%

Fujian Yongfu Power Engineering Co.,Ltd. (SZSE:300712) shareholders are no doubt pleased to see that the share price has bounced 36% in the last month, although it is still struggling to make up recently lost ground. Still, the 30-day jump doesn't change the fact that longer term shareholders have seen their stock decimated by the 53% share price drop in the last twelve months.

Since its price has surged higher, Fujian Yongfu Power EngineeringLtd may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 67.1x, since almost half of all companies in China have P/E ratios under 29x and even P/E's lower than 18x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

Fujian Yongfu Power EngineeringLtd has been struggling lately as its earnings have declined faster than most other companies. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Fujian Yongfu Power EngineeringLtd

Keen to find out how analysts think Fujian Yongfu Power EngineeringLtd's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Fujian Yongfu Power EngineeringLtd's Growth Trending?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Fujian Yongfu Power EngineeringLtd's to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 26%. As a result, earnings from three years ago have also fallen 3.4% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the only analyst covering the company suggest earnings should grow by 254% over the next year. Meanwhile, the rest of the market is forecast to only expand by 41%, which is noticeably less attractive.

In light of this, it's understandable that Fujian Yongfu Power EngineeringLtd'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

Shares in Fujian Yongfu Power EngineeringLtd have built up some good momentum lately, which has really inflated its P/E. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Fujian Yongfu Power EngineeringLtd 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.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Fujian Yongfu Power EngineeringLtd (1 is concerning!) that you need to be mindful of.

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

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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.