Shareholders Should Be Pleased With Oriental Pearl Group Co.,Ltd.'s (SHSE:600637) Price

When close to half the companies in China have price-to-earnings ratios (or "P/E's") below 29x, you may consider Oriental Pearl Group Co.,Ltd. (SHSE:600637) as a stock to potentially avoid with its 37.5x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Oriental Pearl GroupLtd has been struggling lately as its earnings have declined faster than most other companies. It might be that many expect the dismal earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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Is There Enough Growth For Oriental Pearl GroupLtd?

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

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 45%. This means it has also seen a slide in earnings over the longer-term as EPS is down 68% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the sole analyst covering the company suggest earnings should grow by 50% over the next year. With the market only predicted to deliver 41%, the company is positioned for a stronger earnings result.

With this information, we can see why Oriental Pearl GroupLtd is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of Oriental Pearl GroupLtd's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Oriental Pearl GroupLtd, and understanding them should be part of your investment process.

If these risks are making you reconsider your opinion on Oriental Pearl GroupLtd, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.