Despite an already strong run, Jiangsu Shemar Electric Co.,Ltd (SHSE:603530) shares have been powering on, with a gain of 31% in the last thirty days. The last 30 days bring the annual gain to a very sharp 38%.
After such a large jump in price, given close to half the companies in China have price-to-earnings ratios (or "P/E's") below 34x, you may consider Jiangsu Shemar ElectricLtd as a stock to avoid entirely with its 74.4x 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.
Recent times have been quite advantageous for Jiangsu Shemar ElectricLtd as its earnings have been rising very briskly. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
Check out our latest analysis for Jiangsu Shemar ElectricLtd
How Is Jiangsu Shemar ElectricLtd's Growth Trending?
The only time you'd be truly comfortable seeing a P/E as steep as Jiangsu Shemar ElectricLtd's is when the company's growth is on track to outshine the market decidedly.
Taking a look back first, we see that the company grew earnings per share by an impressive 109% last year. However, this wasn't enough as the latest three year period has seen a very unpleasant 22% drop in EPS in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.
Comparing that to the market, which is predicted to deliver 44% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.
With this information, we find it concerning that Jiangsu Shemar ElectricLtd is trading at a P/E higher than the market. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. 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 Key Takeaway
Shares in Jiangsu Shemar ElectricLtd have built up some good momentum lately, which has really inflated its 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.
We've established that Jiangsu Shemar ElectricLtd currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. 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.
Before you settle on your opinion, we've discovered 1 warning sign for Jiangsu Shemar ElectricLtd that you should be aware of.
It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).
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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.