Sinotruk Jinan Truck Co.,Ltd.'s (SZSE:000951) price-to-earnings (or "P/E") ratio of 37.7x might make it look like a sell right now compared to the market in China, where around half of the companies have P/E ratios below 31x and even P/E's below 19x are quite common. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.
With earnings growth that's superior to most other companies of late, Sinotruk Jinan TruckLtd has been doing relatively well. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
How Is Sinotruk Jinan TruckLtd's Growth Trending?
There's an inherent assumption that a company should outperform the market for P/E ratios like Sinotruk Jinan TruckLtd's to be considered reasonable.
Retrospectively, the last year delivered an exceptional 112% gain to the company's bottom line. Still, incredibly EPS has fallen 76% in total from three years ago, which is quite disappointing. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.
Turning to the outlook, the next year should generate growth of 156% as estimated by the five analysts watching the company. That's shaping up to be materially higher than the 40% growth forecast for the broader market.
In light of this, it's understandable that Sinotruk Jinan TruckLtd's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.
The Key Takeaway
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 Sinotruk Jinan TruckLtd 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.
A lot of potential risks can sit within a company's balance sheet. Take a look at our free balance sheet analysis for Sinotruk Jinan TruckLtd with six simple checks on some of these key factors.
Of course, you might also be able to find a better stock than Sinotruk Jinan TruckLtd. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.
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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.