The Price Is Right For Tayho Advanced Materials Group Co., Ltd. (SZSE:002254)

When close to half the companies in China have price-to-earnings ratios (or "P/E's") below 29x, you may consider Tayho Advanced Materials Group Co., Ltd. (SZSE:002254) as a stock to potentially avoid with its 36x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

Tayho Advanced Materials Group hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

See our latest analysis for Tayho Advanced Materials Group

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Tayho Advanced Materials Group.

Does Growth Match The High P/E?

There's an inherent assumption that a company should outperform the market for P/E ratios like Tayho Advanced Materials Group's to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 56%. The last three years don't look nice either as the company has shrunk EPS by 55% in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Shifting to the future, estimates from the two analysts covering the company suggest earnings should grow by 37% per year over the next three years. That's shaping up to be materially higher than the 25% each year growth forecast for the broader market.

With this information, we can see why Tayho Advanced Materials Group 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

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.

As we suspected, our examination of Tayho Advanced Materials Group's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. 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.

Plus, you should also learn about these 3 warning signs we've spotted with Tayho Advanced Materials Group (including 2 which make us uncomfortable).

If you're unsure about the strength of Tayho Advanced Materials Group'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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com