After Leaping 26% Wenzhou Yihua Connector Co., Ltd. (SZSE:002897) Shares Are Not Flying Under The Radar

Wenzhou Yihua Connector Co., Ltd. (SZSE:002897) shares have had a really impressive month, gaining 26% after a shaky period beforehand. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 2.9% in the last twelve months.

Following the firm bounce in price, Wenzhou Yihua Connector may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 60x, since almost half of all companies in China have P/E ratios under 32x and even P/E's lower than 20x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

Wenzhou Yihua Connector 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.

See our latest analysis for Wenzhou Yihua Connector

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Wenzhou Yihua Connector.

Is There Enough Growth For Wenzhou Yihua Connector?

The only time you'd be truly comfortable seeing a P/E as steep as Wenzhou Yihua Connector's is when the company's growth is on track to outshine the market decidedly.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 49%. The last three years don't look nice either as the company has shrunk EPS by 41% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the dual analysts covering the company suggest earnings should grow by 65% per annum over the next three years. With the market only predicted to deliver 26% per annum, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Wenzhou Yihua Connector's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What We Can Learn From Wenzhou Yihua Connector's P/E?

Shares in Wenzhou Yihua Connector have built up some good momentum lately, which has really inflated its P/E. 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 Wenzhou Yihua Connector 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. It's hard to see the share price falling strongly in the near future under these circumstances.

Plus, you should also learn about these 3 warning signs we've spotted with Wenzhou Yihua Connector (including 1 which is potentially serious).

If you're unsure about the strength of Wenzhou Yihua Connector's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.