Shanghai Chinafortune Co., Ltd.'s (SHSE:600621) Shares May Have Run Too Fast Too Soon

With a price-to-earnings (or "P/E") ratio of 34x Shanghai Chinafortune Co., Ltd. (SHSE:600621) may be sending bearish signals at the moment, given that almost half of all companies in China have P/E ratios under 26x and even P/E's lower than 15x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Shanghai Chinafortune has been doing quite well of late. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for Shanghai Chinafortune

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Shanghai Chinafortune.

Does Growth Match The High P/E?

The only time you'd be truly comfortable seeing a P/E as high as Shanghai Chinafortune's is when the company's growth is on track to outshine the market.

Retrospectively, the last year delivered a decent 13% gain to the company's bottom line. The solid recent performance means it was also able to grow EPS by 17% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 3.7% per annum as estimated by the only analyst watching the company. With the market predicted to deliver 19% growth each year, the company is positioned for a weaker earnings result.

With this information, we find it concerning that Shanghai Chinafortune 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. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

What We Can Learn From Shanghai Chinafortune's P/E?

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of Shanghai Chinafortune'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 take the next step, you should know about the 1 warning sign for Shanghai Chinafortune that we have uncovered.

You might be able to find a better investment than Shanghai Chinafortune. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.