Yechiu Metal Recycling (China) Ltd.’s (SHSE:601388) P/E Is On The Mark

With a price-to-earnings (or “P/E”) ratio of 56.5x Yechiu Metal Recycling (China) Ltd. (SHSE:601388) may be sending very bearish signals at the moment, given that almost half of all companies in China have P/E ratios under 31x and even P/E’s lower than 18x 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 Yechiu Metal Recycling (China) as its earnings have been falling quicker 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. You’d really hope so, otherwise you’re paying a pretty hefty price for no particular reason.

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Is There Enough Growth For Yechiu Metal Recycling (China)?

Yechiu Metal Recycling (China)’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.

Retrospectively, the last year delivered a frustrating 67% decrease to the company’s bottom line. The last three years don’t look nice either as the company has shrunk EPS by 88% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 101% each year as estimated by the sole analyst watching the company. Meanwhile, the rest of the market is forecast to only expand by 19% per year, which is noticeably less attractive.

In light of this, it’s understandable that Yechiu Metal Recycling (China)’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 Yechiu Metal Recycling (China)’s P/E?

We’d say the price-to-earnings ratio’s power isn’t primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We’ve established that Yechiu Metal Recycling (China) maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn’t great enough to justify a lower P/E ratio. It’s hard to see the share price falling strongly in the near future under these circumstances.

Don’t forget that there may be other risks. For instance, we’ve identified 1 warning sign for Yechiu Metal Recycling (China) that you should be aware of.

It’s important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and 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.