The Changzhou Galaxy Century Microelectronics Co.,Ltd. (SHSE:688689) share price has fared very poorly over the last month, falling by a substantial 28%. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 21% share price drop.

Although its price has dipped substantially, Changzhou Galaxy Century MicroelectronicsLtd's price-to-earnings (or "P/E") ratio of 36x might still make it look like a sell right now compared to the market in China, where around half of the companies have P/E ratios below 30x and even P/E's below 18x are quite common. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

For example, consider that Changzhou Galaxy Century MicroelectronicsLtd's financial performance has been poor lately as its earnings have been in decline. It might be that many expect the company to still outplay most other companies over the coming period, 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.

View our latest analysis for Changzhou Galaxy Century MicroelectronicsLtd

What Are Growth Metrics Telling Us About The High P/E?

In order to justify its P/E ratio, Changzhou Galaxy Century MicroelectronicsLtd would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered a frustrating 28% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 20% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 42% shows it's an unpleasant look.

In light of this, it's alarming that Changzhou Galaxy Century MicroelectronicsLtd's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

The Bottom Line On Changzhou Galaxy Century MicroelectronicsLtd's P/E

Despite the recent share price weakness, Changzhou Galaxy Century MicroelectronicsLtd's P/E remains higher than most other companies. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Changzhou Galaxy Century MicroelectronicsLtd currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Before you settle on your opinion, we've discovered 2 warning signs for Changzhou Galaxy Century MicroelectronicsLtd that you should be aware of.

Of course, you might also be able to find a better stock than Changzhou Galaxy Century MicroelectronicsLtd. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.