What You Can Learn From Qingmu Tec Co., Ltd.'s (SZSE:301110) P/E

Qingmu Tec Co., Ltd.'s (SZSE:301110) price-to-earnings (or "P/E") ratio of 37.5x 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. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Qingmu Tec certainly has been doing a good job lately as it's been growing earnings more than most other companies. 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.

View our latest analysis for Qingmu Tec

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

Does Growth Match The High P/E?

In order to justify its P/E ratio, Qingmu Tec would need to produce impressive growth in excess of the market.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 11% last year. Ultimately though, it couldn't turn around the poor performance of the prior period, with EPS shrinking 64% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 65% per annum during the coming three years according to the only analyst following the company. That's shaping up to be materially higher than the 24% per year growth forecast for the broader market.

In light of this, it's understandable that Qingmu Tec's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What We Can Learn From Qingmu Tec's P/E?

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.

We've established that Qingmu Tec 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.

Before you take the next step, you should know about the 2 warning signs for Qingmu Tec (1 is potentially serious!) that we have uncovered.

You might be able to find a better investment than Qingmu Tec. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com