Getting In Cheap On Tianshui Huatian Technology Co., Ltd. (SZSE:002185) Might Be Difficult

When close to half the companies in China have price-to-earnings ratios (or "P/E's") below 27x, you may consider Tianshui Huatian Technology Co., Ltd. (SZSE:002185) as a stock to avoid entirely with its 72.7x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Tianshui Huatian Technology hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Tianshui Huatian Technology

Keen to find out how analysts think Tianshui Huatian Technology's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Enough Growth For Tianshui Huatian Technology?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Tianshui Huatian Technology'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 12%. The last three years don't look nice either as the company has shrunk EPS by 64% in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Shifting to the future, estimates from the four analysts covering the company suggest earnings should grow by 29% per year over the next three years. With the market only predicted to deliver 24% per year, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Tianshui Huatian Technology'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.

The Key Takeaway

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Tianshui Huatian Technology'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. It's hard to see the share price falling strongly in the near future under these circumstances.

You always need to take note of risks, for example - Tianshui Huatian Technology has 1 warning sign we think you should be aware of.

If you're unsure about the strength of Tianshui Huatian Technology's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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