Xiamen Sinic-Tek Intelligent Technology Co., Ltd.'s (SZSE:301568) Price Is Out Of Tune With Earnings

Xiamen Sinic-Tek Intelligent Technology Co., Ltd.'s (SZSE:301568) price-to-earnings (or "P/E") ratio of 64.2x might make it look like a strong sell right now compared to the market in China, where around half of the companies have P/E ratios below 36x and even P/E's below 20x are quite common. 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.

For example, consider that Xiamen Sinic-Tek Intelligent Technology's financial performance has been poor lately as its earnings have been in decline. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.

View our latest analysis for Xiamen Sinic-Tek Intelligent Technology

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Xiamen Sinic-Tek Intelligent Technology's earnings, revenue and cash flow.

Is There Enough Growth For Xiamen Sinic-Tek Intelligent Technology?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Xiamen Sinic-Tek Intelligent Technology's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 52% 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 56% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 38% shows it's an unpleasant look.

In light of this, it's alarming that Xiamen Sinic-Tek Intelligent Technology's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

The Bottom Line On Xiamen Sinic-Tek Intelligent Technology's 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.

Our examination of Xiamen Sinic-Tek Intelligent Technology revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

There are also other vital risk factors to consider and we've discovered 2 warning signs for Xiamen Sinic-Tek Intelligent Technology (1 is significant!) that you should be aware of before investing here.

If these risks are making you reconsider your opinion on Xiamen Sinic-Tek Intelligent Technology, 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.