Some Confidence Is Lacking In Changbai Mountain Tourism Co., Ltd.'s (SHSE:603099) P/E

When close to half the companies in China have price-to-earnings ratios (or "P/E's") below 39x, you may consider Changbai Mountain Tourism Co., Ltd. (SHSE:603099) as a stock to avoid entirely with its 67.1x 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 so lofty.

Changbai Mountain Tourism certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Changbai Mountain Tourism

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Is There Enough Growth For Changbai Mountain Tourism?

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

If we review the last year of earnings growth, the company posted a worthy increase of 13%. Although, the latest three year period in total hasn't been as good as it didn't manage to provide any growth at all. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Looking ahead now, EPS is anticipated to climb by 40% during the coming year according to the three analysts following the company. With the market predicted to deliver 37% growth , the company is positioned for a comparable earnings result.

In light of this, it's curious that Changbai Mountain Tourism's P/E sits above the majority of other companies. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

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.

We've established that Changbai Mountain Tourism currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for Changbai Mountain Tourism with six simple checks will allow you to discover any risks that could be an issue.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and 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.