Sichuan Jiuzhou Electronic Co., Ltd.'s (SZSE:000801) Price In Tune With Earnings

Sichuan Jiuzhou Electronic Co., Ltd.'s (SZSE:000801) price-to-earnings (or "P/E") ratio of 62.2x 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 31x and even P/E's below 19x are quite common. 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.

Recent earnings growth for Sichuan Jiuzhou Electronic has been in line with the market. One possibility is that the P/E is high because investors think this modest earnings performance will accelerate. If not, then existing shareholders may be a little nervous about the viability of the share price.

Check out our latest analysis for Sichuan Jiuzhou Electronic

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Is There Enough Growth For Sichuan Jiuzhou Electronic?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Sichuan Jiuzhou Electronic's to be considered reasonable.

Taking a look back first, we see that there was hardly any earnings per share growth to speak of for the company over the past year. However, a few strong years before that means that it was still able to grow EPS by an impressive 161% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next year should generate growth of 63% as estimated by the only analyst watching the company. That's shaping up to be materially higher than the 36% growth forecast for the broader market.

With this information, we can see why Sichuan Jiuzhou Electronic is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Sichuan Jiuzhou Electronic's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. 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.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Sichuan Jiuzhou Electronic you should know about.

If you're unsure about the strength of Sichuan Jiuzhou Electronic'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.