When close to half the companies in China have price-to-earnings ratios (or "P/E's") below 27x, you may consider Suzhou Douson Drilling & Production Equipment Co.,Ltd. (SHSE:603800) as a stock to avoid entirely with its 45.5x P/E ratio. 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 Suzhou Douson Drilling & Production EquipmentLtd 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
Check out our latest analysis for Suzhou Douson Drilling & Production EquipmentLtd
Is There Enough Growth For Suzhou Douson Drilling & Production EquipmentLtd?
Suzhou Douson Drilling & Production EquipmentLtd'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.
If we review the last year of earnings growth, the company posted a terrific increase of 34%. Still, EPS has barely risen at all from three years ago in total, which is not ideal. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.
Turning to the outlook, the next year should generate growth of 218% as estimated by the three analysts watching the company. That's shaping up to be materially higher than the 42% growth forecast for the broader market.
With this information, we can see why Suzhou Douson Drilling & Production EquipmentLtd is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.
The Key Takeaway
Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
As we suspected, our examination of Suzhou Douson Drilling & Production EquipmentLtd'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. Unless these conditions change, they will continue to provide strong support to the share price.
Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Suzhou Douson Drilling & Production EquipmentLtd that you should be aware of.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on 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.
