Shenzhen Crastal Technology Co.,Ltd's (SZSE:300824) Popularity With Investors Is Under Threat From Overpricing

When close to half the companies in China have price-to-earnings ratios (or "P/E's") below 27x, you may consider Shenzhen Crastal Technology Co.,Ltd (SZSE:300824) as a stock to potentially avoid with its 34.5x 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.

Recent times have been advantageous for Shenzhen Crastal TechnologyLtd as its earnings have been rising faster than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Shenzhen Crastal TechnologyLtd

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Is There Enough Growth For Shenzhen Crastal TechnologyLtd?

There's an inherent assumption that a company should outperform the market for P/E ratios like Shenzhen Crastal TechnologyLtd's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 59% gain to the company's bottom line. Still, incredibly EPS has fallen 33% in total from three years ago, which is quite disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 16% per year as estimated by the three analysts watching the company. That's shaping up to be materially lower than the 24% each year growth forecast for the broader market.

With this information, we find it concerning that Shenzhen Crastal TechnologyLtd is trading at a P/E higher than the market. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Bottom Line On Shenzhen Crastal TechnologyLtd'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.

Our examination of Shenzhen Crastal TechnologyLtd's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Before you settle on your opinion, we've discovered 2 warning signs for Shenzhen Crastal TechnologyLtd that you should be aware of.

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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