Why We're Not Concerned About Suzhou TFC Optical Communication Co., Ltd.'s (SZSE:300394) Share Price

When close to half the companies in China have price-to-earnings ratios (or "P/E's") below 28x, you may consider Suzhou TFC Optical Communication Co., Ltd. (SZSE:300394) as a stock to avoid entirely with its 56.4x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

With earnings growth that's superior to most other companies of late, Suzhou TFC Optical Communication has been doing relatively well. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Suzhou TFC Optical Communication

Keen to find out how analysts think Suzhou TFC Optical Communication's future stacks up against the industry? In that case, our free report is a great place to start.

What Are Growth Metrics Telling Us About The High P/E?

In order to justify its P/E ratio, Suzhou TFC Optical Communication would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered an exceptional 121% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 175% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 44% per year during the coming three years according to the twelve analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 24% per annum, which is noticeably less attractive.

In light of this, it's understandable that Suzhou TFC Optical Communication's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

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.

As we suspected, our examination of Suzhou TFC Optical 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. It's hard to see the share price falling strongly in the near future under these circumstances.

There are also other vital risk factors to consider and we've discovered 2 warning signs for Suzhou TFC Optical Communication (1 shouldn't be ignored!) that you should be aware of before investing here.

If these risks are making you reconsider your opinion on Suzhou TFC Optical Communication, 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com