Shanghai United Imaging Healthcare Co., Ltd.'s (SHSE:688271) 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 32x, you may consider Shanghai United Imaging Healthcare Co., Ltd. (SHSE:688271) as a stock to avoid entirely with its 56.2x 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.

With earnings growth that's superior to most other companies of late, Shanghai United Imaging Healthcare has been doing relatively well. 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 Shanghai United Imaging Healthcare

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

What Are Growth Metrics Telling Us About The High P/E?

In order to justify its P/E ratio, Shanghai United Imaging Healthcare would need to produce outstanding growth well in excess of the market.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 9.6% last year. This was backed up an excellent period prior to see EPS up by 84% 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 21% as estimated by the ten analysts watching the company. With the market predicted to deliver 40% growth , the company is positioned for a weaker earnings result.

With this information, we find it concerning that Shanghai United Imaging Healthcare is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. 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.

The Bottom Line On Shanghai United Imaging Healthcare's P/E

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Shanghai United Imaging Healthcare currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. 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.

The company's balance sheet is another key area for risk analysis. Our free balance sheet analysis for Shanghai United Imaging Healthcare with six simple checks will allow you to discover any risks that could be an issue.

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.