Yantai Dongcheng Pharmaceutical Group Co.,Ltd.'s (SZSE:002675) price-to-earnings (or "P/E") ratio of 54.8x might make it look like a strong sell right now compared to the market in China, where around half of the companies have P/E ratios below 34x and even P/E's below 20x are quite common. 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.

Yantai Dongcheng Pharmaceutical GroupLtd certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors' willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Yantai Dongcheng Pharmaceutical GroupLtd

Does Growth Match The High P/E?

In order to justify its P/E ratio, Yantai Dongcheng Pharmaceutical GroupLtd would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered an exceptional 16% gain to the company's bottom line. EPS has also lifted 19% in aggregate from three years ago, mostly thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

Looking ahead now, EPS is anticipated to climb by 69% during the coming year according to the seven analysts following the company. That's shaping up to be materially higher than the 44% growth forecast for the broader market.

In light of this, it's understandable that Yantai Dongcheng Pharmaceutical GroupLtd'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 Yantai Dongcheng Pharmaceutical GroupLtd's P/E?

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.

As we suspected, our examination of Yantai Dongcheng Pharmaceutical GroupLtd's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

Plus, you should also learn about this 1 warning sign we've spotted with Yantai Dongcheng Pharmaceutical GroupLtd.

If these risks are making you reconsider your opinion on Yantai Dongcheng Pharmaceutical GroupLtd, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.