Why Investors Shouldn't Be Surprised By Chengdu Spaceon Electronics Co., Ltd.'s (SZSE:002935) P/E

When close to half the companies in China have price-to-earnings ratios (or "P/E's") below 29x, you may consider Chengdu Spaceon Electronics Co., Ltd. (SZSE:002935) as a stock to avoid entirely with its 62.6x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Chengdu Spaceon Electronics could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.

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How Is Chengdu Spaceon Electronics' Growth Trending?

In order to justify its P/E ratio, Chengdu Spaceon Electronics would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered a frustrating 23% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 15% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 30% per year as estimated by the one analyst watching the company. Meanwhile, the rest of the market is forecast to only expand by 25% each year, which is noticeably less attractive.

With this information, we can see why Chengdu Spaceon Electronics 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

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 Chengdu Spaceon Electronics 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. It's hard to see the share price falling strongly in the near future under these circumstances.

Before you take the next step, you should know about the 1 warning sign for Chengdu Spaceon Electronics that we have uncovered.

If these risks are making you reconsider your opinion on Chengdu Spaceon Electronics, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.