Investors Appear Satisfied With Shenzhen Kingdom Sci-Tech Co., Ltd's (SHSE:600446) Prospects

With a price-to-earnings (or "P/E") ratio of 41.3x Shenzhen Kingdom Sci-Tech Co., Ltd (SHSE:600446) may be sending very bearish signals at the moment, given that almost half of all companies in China have P/E ratios under 26x and even P/E's lower than 16x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Shenzhen Kingdom Sci-Tech 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. If not, then existing shareholders may be very nervous about the viability of the share price.

See our latest analysis for Shenzhen Kingdom Sci-Tech

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Shenzhen Kingdom Sci-Tech.

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

In order to justify its P/E ratio, Shenzhen Kingdom Sci-Tech would need to produce outstanding growth well in excess of the market.

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 13%. This means it has also seen a slide in earnings over the longer-term as EPS is down 5.1% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 32% per year as estimated by the dual analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 19% each year, which is noticeably less attractive.

With this information, we can see why Shenzhen Kingdom Sci-Tech 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 Final Word

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Shenzhen Kingdom Sci-Tech 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.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Shenzhen Kingdom Sci-Tech that you need to be mindful of.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.