Ningbo ZhongDa Leader Intelligent Transmission Co., Ltd. (SZSE:002896) shareholders that were waiting for something to happen have been dealt a blow with a 26% share price drop in the last month. The recent drop has obliterated the annual return, with the share price now down 2.9% over that longer period.

Even after such a large drop in price, given close to half the companies in China have price-to-earnings ratios (or "P/E's") below 29x, you may still consider Ningbo ZhongDa Leader Intelligent Transmission as a stock to avoid entirely with its 50x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Recent times have been pleasing for Ningbo ZhongDa Leader Intelligent Transmission 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 Ningbo ZhongDa Leader Intelligent Transmission

Is There Enough Growth For Ningbo ZhongDa Leader Intelligent Transmission?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Ningbo ZhongDa Leader Intelligent Transmission's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 34% gain to the company's bottom line. Still, incredibly EPS has fallen 7.8% in total from three years ago, which is quite disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next year should generate growth of 26% as estimated by the only analyst watching the company. Meanwhile, the rest of the market is forecast to expand by 42%, which is noticeably more attractive.

In light of this, it's alarming that Ningbo ZhongDa Leader Intelligent Transmission's P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Bottom Line On Ningbo ZhongDa Leader Intelligent Transmission's P/E

A significant share price dive has done very little to deflate Ningbo ZhongDa Leader Intelligent Transmission's very lofty 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.

We've established that Ningbo ZhongDa Leader Intelligent Transmission currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

It is also worth noting that we have found 1 warning sign for Ningbo ZhongDa Leader Intelligent Transmission that you need to take into consideration.

If you're unsure about the strength of Ningbo ZhongDa Leader Intelligent Transmission's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.