Shenzhen Sunnypol Optoelectronics Co.,Ltd.'s (SZSE:002876) price-to-earnings (or "P/E") ratio of 63x 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 33x 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.
With earnings that are retreating more than the market's of late, Shenzhen Sunnypol OptoelectronicsLtd has been very sluggish. It might be that many expect the dismal earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
Check out our latest analysis for Shenzhen Sunnypol OptoelectronicsLtd
What Are Growth Metrics Telling Us About The High P/E?
There's an inherent assumption that a company should far outperform the market for P/E ratios like Shenzhen Sunnypol OptoelectronicsLtd's to be considered reasonable.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 68%. As a result, earnings from three years ago have also fallen 12% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.
Looking ahead now, EPS is anticipated to climb by 257% during the coming year according to the dual analysts following the company. That's shaping up to be materially higher than the 43% growth forecast for the broader market.
In light of this, it's understandable that Shenzhen Sunnypol OptoelectronicsLtd'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 Bottom Line On Shenzhen Sunnypol OptoelectronicsLtd'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.
As we suspected, our examination of Shenzhen Sunnypol OptoelectronicsLtd's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.
Having said that, be aware Shenzhen Sunnypol OptoelectronicsLtd is showing 4 warning signs in our investment analysis, you should know about.
If these risks are making you reconsider your opinion on Shenzhen Sunnypol OptoelectronicsLtd, 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.