Shanghai Friendess Electronic Technology Corporation Limited's (SHSE:688188) Shares May Have Run Too Fast Too Soon

Shanghai Friendess Electronic Technology Corporation Limited's (SHSE:688188) price-to-earnings (or "P/E") ratio of 58.1x 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 31x and even P/E's below 19x 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.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Shanghai Friendess Electronic Technology has been doing quite well of late. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Shanghai Friendess Electronic Technology

Keen to find out how analysts think Shanghai Friendess Electronic 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 Shanghai Friendess Electronic Technology?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 50% last year. The strong recent performance means it was also able to grow EPS by 87% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to climb by 35% during the coming year according to the ten analysts following the company. Meanwhile, the rest of the market is forecast to expand by 40%, which is noticeably more attractive.

With this information, we find it concerning that Shanghai Friendess Electronic Technology is trading at a P/E higher than the market. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

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.

We've established that Shanghai Friendess Electronic Technology currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for Shanghai Friendess Electronic Technology with six simple checks on some of these key factors.

Of course, you might also be able to find a better stock than Shanghai Friendess Electronic Technology. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.