Zhejiang Yonghe Refrigerant Co., Ltd.'s (SHSE:605020) P/E Still Appears To Be Reasonable

Zhejiang Yonghe Refrigerant Co., Ltd.'s (SHSE:605020) price-to-earnings (or "P/E") ratio of 47.4x might make it look like a sell right now compared to the market in China, where around half of the companies have P/E ratios below 34x and even P/E's below 20x are quite common. 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.

Zhejiang Yonghe Refrigerant has been struggling lately as its earnings have declined faster than most other companies. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. If not, then existing shareholders may be very nervous about the viability of the share price.

View our latest analysis for Zhejiang Yonghe Refrigerant

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

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

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

Retrospectively, the last year delivered a frustrating 28% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 34% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Shifting to the future, estimates from the one analyst covering the company suggest earnings should grow by 153% over the next year. That's shaping up to be materially higher than the 38% growth forecast for the broader market.

With this information, we can see why Zhejiang Yonghe Refrigerant is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Zhejiang Yonghe Refrigerant's P/E

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 Zhejiang Yonghe Refrigerant maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

There are also other vital risk factors to consider and we've discovered 4 warning signs for Zhejiang Yonghe Refrigerant (1 is significant!) that you should be aware of before investing here.

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.