With a price-to-earnings (or “P/E”) ratio of 52.2x Huada Automotive Technology Corp.,Ltd (SHSE:603358) may be sending bearish signals at the moment, given that almost half of all companies in China have P/E ratios under 35x and even P/E’s lower than 20x are not unusual. Although, it’s not wise to just take the P/E at face value as there may be an explanation why it’s as high as it is.

Huada Automotive TechnologyLtd has been struggling lately as its earnings have declined faster than most other companies. It might be that many expect the dismal earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be very nervous about the viability of the share price.

Check out our latest analysis for Huada Automotive TechnologyLtd

If you’d like to see what analysts are forecasting going forward, you should check out our free report on Huada Automotive TechnologyLtd.

What Are Growth Metrics Telling Us About The High P/E?

The only time you’d be truly comfortable seeing a P/E as high as Huada Automotive TechnologyLtd’s is when the company’s growth is on track to outshine the market.

Retrospectively, the last year delivered a frustrating 6.0% decrease to the company’s bottom line. As a result, earnings from three years ago have also fallen 23% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the only analyst covering the company suggest earnings should grow by 147% over the next year. That’s shaping up to be materially higher than the 40% growth forecast for the broader market.

With this information, we can see why Huada Automotive TechnologyLtd 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 Bottom Line On Huada Automotive TechnologyLtd’s P/E

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 Huada Automotive TechnologyLtd’s analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren’t under threat. It’s hard to see the share price falling strongly in the near future under these circumstances.

It’s always necessary to consider the ever-present spectre of investment risk. We’ve identified 1 warning sign with Huada Automotive TechnologyLtd, and understanding should be part of your investment process.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.