Why Investors Shouldn't Be Surprised By State Power Rixin Technology Co., Ltd.'s (SZSE:301162) P/E

State Power Rixin Technology Co., Ltd.'s (SZSE:301162) price-to-earnings (or "P/E") ratio of 59.4x might make it look like a strong sell right now compared to the market in China, where around half of the companies have P/E ratios below 37x and even P/E's below 21x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

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With earnings growth that's superior to most other companies of late, State Power Rixin Technology has been doing relatively well. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for State Power Rixin Technology

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

How Is State Power Rixin Technology's Growth Trending?

There's an inherent assumption that a company should far outperform the market for P/E ratios like State Power Rixin Technology's to be considered reasonable.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 2.8% last year. The latest three year period has also seen a 7.8% overall rise in EPS, aided somewhat by its short-term performance. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Shifting to the future, estimates from the nine analysts covering the company suggest earnings should grow by 57% over the next year. That's shaping up to be materially higher than the 36% growth forecast for the broader market.

In light of this, it's understandable that State Power Rixin 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

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that State Power Rixin Technology 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. Unless these conditions change, they will continue to provide strong support to the share price.

Plus, you should also learn about these 2 warning signs we've spotted with State Power Rixin Technology (including 1 which is a bit unpleasant).

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.