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China Automotive Systems, Inc.'s (NASDAQ:CAAS) Share Price Matching Investor Opinion

Simply Wall St
·3 mins read

With a price-to-earnings (or "P/E") ratio of 52.6x China Automotive Systems, Inc. (NASDAQ:CAAS) may be sending very bearish signals at the moment, given that almost half of all companies in the United States have P/E ratios under 18x and even P/E's lower than 10x 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 so lofty.

Recent times have been pleasing for China Automotive Systems as its earnings have risen in spite of the market's earnings going into reverse. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for China Automotive Systems

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Want the full picture on analyst estimates for the company? Then our free report on China Automotive Systems will help you uncover what's on the horizon.

Is There Enough Growth For China Automotive Systems?

China Automotive Systems' 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.

Taking a look back first, we see that the company grew earnings per share by an impressive 64% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 93% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Looking ahead now, EPS is anticipated to climb by 215% during the coming year according to the sole analyst following the company. With the market only predicted to deliver 5.4%, the company is positioned for a stronger earnings result.

With this information, we can see why China Automotive Systems is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

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 China Automotive Systems 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. It's hard to see the share price falling strongly in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 2 warning signs for China Automotive Systems you should be aware of.

You might be able to find a better investment than China Automotive Systems. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).

This article by Simply Wall St is general in nature. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.