Shanghai Zhangjiang Hi-Tech Park Development Co., Ltd. (SHSE:600895) shares have had a horrible month, losing 25% after a relatively good period beforehand. Looking at the bigger picture, even after this poor month the stock is up 64% in the last year.

Although its price has dipped substantially, you could still be forgiven for feeling indifferent about Shanghai Zhangjiang Hi-Tech Park Development's P/E ratio of 34.5x, since the median price-to-earnings (or "P/E") ratio in China is also close to 34x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

Shanghai Zhangjiang Hi-Tech Park Development 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. One possibility is that the P/E is moderate because investors think the company's earnings will be less resilient moving forward. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

See our latest analysis for Shanghai Zhangjiang Hi-Tech Park Development

Does Growth Match The P/E?

The only time you'd be comfortable seeing a P/E like Shanghai Zhangjiang Hi-Tech Park Development's is when the company's growth is tracking the market closely.

Taking a look back first, we see that the company grew earnings per share by an impressive 35% last year. However, this wasn't enough as the latest three year period has seen a very unpleasant 26% drop in EPS in aggregate. 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 30% during the coming year according to the sole analyst following the company. That's shaping up to be materially lower than the 44% growth forecast for the broader market.

In light of this, it's curious that Shanghai Zhangjiang Hi-Tech Park Development's P/E sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Bottom Line On Shanghai Zhangjiang Hi-Tech Park Development's P/E

Shanghai Zhangjiang Hi-Tech Park Development's plummeting stock price has brought its P/E right back to the rest of the market. 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.

We've established that Shanghai Zhangjiang Hi-Tech Park Development currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Before you take the next step, you should know about the 3 warning signs for Shanghai Zhangjiang Hi-Tech Park Development (2 are potentially serious!) that we have uncovered.

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.