Chaozhou Three-Circle (Group) Co.,Ltd.'s (SZSE:300408) Price Is Out Of Tune With Earnings

Chaozhou Three-Circle (Group) Co.,Ltd.'s (SZSE:300408) price-to-earnings (or "P/E") ratio of 32.7x might make it look like a sell right now compared to the market in China, where around half of the companies have P/E ratios below 28x and even P/E's below 17x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

With earnings growth that's superior to most other companies of late, Chaozhou Three-Circle (Group)Ltd 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.

Check out our latest analysis for Chaozhou Three-Circle (Group)Ltd

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Chaozhou Three-Circle (Group)Ltd.

How Is Chaozhou Three-Circle (Group)Ltd's Growth Trending?

There's an inherent assumption that a company should outperform the market for P/E ratios like Chaozhou Three-Circle (Group)Ltd's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 26%. Still, incredibly EPS has fallen 9.3% in total from three years ago, which is quite disappointing. 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 20% each year as estimated by the seven analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 25% per annum, which is noticeably more attractive.

With this information, we find it concerning that Chaozhou Three-Circle (Group)Ltd is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. 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 Final Word

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Chaozhou Three-Circle (Group)Ltd 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. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You should always think about risks. Case in point, we've spotted 2 warning signs for Chaozhou Three-Circle (Group)Ltd you should be aware of.

Of course, you might also be able to find a better stock than Chaozhou Three-Circle (Group)Ltd. 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.

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