Sinopec Oilfield Equipment Corporation (SZSE:000852) shares have had a really impressive month, gaining 26% after a shaky period beforehand. Looking further back, the 25% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.
Since its price has surged higher, Sinopec Oilfield Equipment's price-to-earnings (or "P/E") ratio of 79.5x 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 30x and even P/E's below 18x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.
Recent times have been pleasing for Sinopec Oilfield Equipment as its earnings have risen in spite of the market's earnings going into reverse. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. If not, then existing shareholders might be a little nervous about the viability of the share price.
Check out our latest analysis for Sinopec Oilfield Equipment
How Is Sinopec Oilfield Equipment's Growth Trending?
Sinopec Oilfield Equipment's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.
Taking a look back first, we see that the company grew earnings per share by an impressive 22% last year. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.
Turning to the outlook, the next year should generate growth of 65% as estimated by the two analysts watching the company. With the market only predicted to deliver 42%, the company is positioned for a stronger earnings result.
In light of this, it's understandable that Sinopec Oilfield Equipment'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 Sinopec Oilfield Equipment's P/E
Shares in Sinopec Oilfield Equipment have built up some good momentum lately, which has really inflated its P/E. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
We've established that Sinopec Oilfield Equipment maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.
You need to take note of risks, for example - Sinopec Oilfield Equipment has 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.
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.