Earnings Tell The Story For Shenzhen Sunway Communication Co., Ltd. (SZSE:300136)

With a price-to-earnings (or "P/E") ratio of 32.5x Shenzhen Sunway Communication Co., Ltd. (SZSE:300136) may be sending bearish signals at the moment, given that almost half of all companies in China have P/E ratios under 28x and even P/E's lower than 17x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

With earnings that are retreating more than the market's of late, Shenzhen Sunway Communication has been very sluggish. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. If not, then existing shareholders may be very nervous about the viability of the share price.

View our latest analysis for Shenzhen Sunway Communication

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Shenzhen Sunway Communication.

Is There Enough Growth For Shenzhen Sunway Communication?

The only time you'd be truly comfortable seeing a P/E as high as Shenzhen Sunway Communication's is when the company's growth is on track to outshine the market.

Retrospectively, the last year delivered a frustrating 10% 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 40% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next year should generate growth of 62% as estimated by the four analysts watching the company. That's shaping up to be materially higher than the 41% growth forecast for the broader market.

With this information, we can see why Shenzhen Sunway Communication is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Shenzhen Sunway Communication's P/E

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.

As we suspected, our examination of Shenzhen Sunway Communication's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. 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.

Many other vital risk factors can be found on the company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Shenzhen Sunway Communication with six simple checks.

Of course, you might also be able to find a better stock than Shenzhen Sunway Communication. 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.