Some Confidence Is Lacking In Jiangsu Xiehe Electronic Co.,Ltd.'s (SHSE:605258) P/E

When close to half the companies in China have price-to-earnings ratios (or "P/E's") below 38x, you may consider Jiangsu Xiehe Electronic Co.,Ltd. (SHSE:605258) as a stock to potentially avoid with its 47.3x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

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Recent times have been quite advantageous for Jiangsu Xiehe ElectronicLtd as its earnings have been rising very briskly. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Jiangsu Xiehe ElectronicLtd

Although there are no analyst estimates available for Jiangsu Xiehe ElectronicLtd, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Jiangsu Xiehe ElectronicLtd's Growth Trending?

Jiangsu Xiehe ElectronicLtd's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 35% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 39% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Comparing that to the market, which is predicted to deliver 37% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

With this information, we find it concerning that Jiangsu Xiehe ElectronicLtd is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

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 Jiangsu Xiehe ElectronicLtd currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

It is also worth noting that we have found 2 warning signs for Jiangsu Xiehe ElectronicLtd (1 can't be ignored!) that you need to take into consideration.

You might be able to find a better investment than Jiangsu Xiehe ElectronicLtd. 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.