The NanJing Research Institute of Surveying, Mapping & Geotechnical Investigation, Co.Ltd (SZSE:300826) share price has fared very poorly over the last month, falling by a substantial 27%. The last month has meant the stock is now only up 4.3% during the last year.

Even after such a large drop in price, given around half the companies in China have price-to-earnings ratios (or "P/E's") below 29x, you may still consider NanJing Research Institute of Surveying Mapping & Geotechnical InvestigationLtd as a stock to potentially avoid with its 34.7x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

For instance, NanJing Research Institute of Surveying Mapping & Geotechnical InvestigationLtd's receding earnings in recent times would have to be some food for thought. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.

Check out our latest analysis for NanJing Research Institute of Surveying Mapping & Geotechnical InvestigationLtd

Is There Enough Growth For NanJing Research Institute of Surveying Mapping & Geotechnical InvestigationLtd?

The only time you'd be truly comfortable seeing a P/E as high as NanJing Research Institute of Surveying Mapping & Geotechnical InvestigationLtd's is when the company's growth is on track to outshine the market.

Retrospectively, the last year delivered a frustrating 13% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 40% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Comparing that to the market, which is predicted to deliver 42% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

In light of this, it's alarming that NanJing Research Institute of Surveying Mapping & Geotechnical InvestigationLtd'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 Key Takeaway

Despite the recent share price weakness, NanJing Research Institute of Surveying Mapping & Geotechnical InvestigationLtd's P/E remains higher than most other companies. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

Our examination of NanJing Research Institute of Surveying Mapping & Geotechnical InvestigationLtd revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. 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 take the next step, you should know about the 5 warning signs for NanJing Research Institute of Surveying Mapping & Geotechnical InvestigationLtd (1 is a bit unpleasant!) that we have uncovered.

Of course, you might also be able to find a better stock than NanJing Research Institute of Surveying Mapping & Geotechnical InvestigationLtd. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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