To the annoyance of some shareholders, Road Environment Technology Co.,Ltd. (SHSE:688156) shares are down a considerable 29% in the last month, which continues a horrid run for the company. For any long-term shareholders, the last month ends a year to forget by locking in a 52% share price decline.
In spite of the heavy fall in price, Road Environment TechnologyLtd may still be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 58x, since almost half of all companies in China have P/E ratios under 26x and even P/E's lower than 16x 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.
Recent times haven't been advantageous for Road Environment TechnologyLtd as its earnings have been falling quicker than most other companies. 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
Is There Enough Growth For Road Environment TechnologyLtd?
There's an inherent assumption that a company should far outperform the market for P/E ratios like Road Environment TechnologyLtd's to be considered reasonable.
Retrospectively, the last year delivered a frustrating 47% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 16% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.
Looking ahead now, EPS is anticipated to climb by 288% during the coming year according to the three analysts following the company. With the market only predicted to deliver 41%, the company is positioned for a stronger earnings result.
In light of this, it's understandable that Road Environment TechnologyLtd'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.
What We Can Learn From Road Environment TechnologyLtd's P/E?
Even after such a strong price drop, Road Environment TechnologyLtd's P/E still exceeds the rest of the market significantly. 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.
We've established that Road Environment TechnologyLtd 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 - Road Environment TechnologyLtd has 3 warning signs (and 1 which doesn't sit too well with us) we think you should know about.
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.