With a price-to-earnings (or “P/E”) ratio of 36.4x 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 28x and even P/E’s lower than 17x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it’s justified.

Recent times have been advantageous for Huada Automotive TechnologyLtd as its earnings have been rising faster than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.

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Is There Enough Growth For Huada Automotive TechnologyLtd?

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.

Taking a look back first, we see that the company grew earnings per share by an impressive 22% last year. The latest three year period has also seen a 25% overall rise in EPS, aided extensively by its short-term performance. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Shifting to the future, estimates from the lone analyst covering the company suggest earnings should grow by 35% per annum over the next three years. With the market only predicted to deliver 24% per year, the company is positioned for a stronger earnings result.

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 Final Word

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.

We’ve established that Huada Automotive 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.

Don’t forget that there may be other risks. For instance, we’ve identified 1 warning sign for Huada Automotive TechnologyLtd that you should be aware of.

If you’re unsure about the strength of Huada Automotive TechnologyLtd’s business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.

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