Why Investors Shouldn't Be Surprised By Shanghai Lujiazui Finance & Trade Zone Development Co.,Ltd.'s (SHSE:600663) P/E

Shanghai Lujiazui Finance & Trade Zone Development Co.,Ltd.'s (SHSE:600663) price-to-earnings (or "P/E") ratio of 39.5x 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 27x and even P/E's below 16x 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.

With earnings growth that's superior to most other companies of late, Shanghai Lujiazui Finance & Trade Zone DevelopmentLtd has been doing relatively well. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for Shanghai Lujiazui Finance & Trade Zone DevelopmentLtd

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Does Growth Match The High P/E?

Shanghai Lujiazui Finance & Trade Zone DevelopmentLtd's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 35% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 79% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next year should generate growth of 116% as estimated by the lone analyst watching the company. With the market only predicted to deliver 36%, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Shanghai Lujiazui Finance & Trade Zone DevelopmentLtd's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From Shanghai Lujiazui Finance & Trade Zone DevelopmentLtd's P/E?

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Shanghai Lujiazui Finance & Trade Zone DevelopmentLtd maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

Before you settle on your opinion, we've discovered 3 warning signs for Shanghai Lujiazui Finance & Trade Zone DevelopmentLtd (1 is a bit unpleasant!) that you should be aware of.

You might be able to find a better investment than Shanghai Lujiazui Finance & Trade Zone DevelopmentLtd. 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.