Market Participants Recognise Taiji Computer Corporation Limited's (SZSE:002368) Earnings

When close to half the companies in China have price-to-earnings ratios (or "P/E's") below 28x, you may consider Taiji Computer Corporation Limited (SZSE:002368) as a stock to potentially avoid with its 38.2x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Taiji Computer hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It might be that many expect the dour 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.

View our latest analysis for Taiji Computer

Want the full picture on analyst estimates for the company? Then our free report on Taiji Computer will help you uncover what's on the horizon.

Is There Enough Growth For Taiji Computer?

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

Retrospectively, the last year delivered a frustrating 11% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 9.6% overall. 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 29% per annum during the coming three years according to the eight analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 25% per annum, which is noticeably less attractive.

With this information, we can see why Taiji Computer 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

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 Taiji Computer 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. Unless these conditions change, they will continue to provide strong support to the share price.

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

You might be able to find a better investment than Taiji Computer. 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).

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

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