With a price-to-earnings (or "P/E") ratio of 60.9x CASTECH Inc. (SZSE:002222) may be sending very bearish signals at the moment, given that almost half of all companies in China have P/E ratios under 34x and even P/E's lower than 20x are not unusual. 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 that are retreating more than the market's of late, CASTECH 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.
See our latest analysis for CASTECH
What Are Growth Metrics Telling Us About The High P/E?
The only time you'd be truly comfortable seeing a P/E as steep as CASTECH's is when the company's growth is on track to outshine the market decidedly.
Retrospectively, the last year delivered a frustrating 6.7% decrease to the company's bottom line. Still, the latest three year period has seen an excellent 39% overall rise in EPS, in spite of its unsatisfying short-term performance. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.
Looking ahead now, EPS is anticipated to climb by 36% during the coming year according to the dual analysts following the company. With the market predicted to deliver 44% growth , the company is positioned for a weaker earnings result.
With this information, we find it concerning that CASTECH 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 Bottom Line On CASTECH's P/E
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.
Our examination of CASTECH's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. 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. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.
Having said that, be aware CASTECH is showing 2 warning signs in our investment analysis, and 1 of those is concerning.
If these risks are making you reconsider your opinion on CASTECH, explore our interactive list of high quality stocks to get an idea of what else is out there.
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