Zhejiang Sanmei Chemical Industry Co.,Ltd.'s (SHSE:603379) price-to-earnings (or "P/E") ratio of 63.7x 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 32x and even P/E's below 20x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's superior to most other companies of late, Zhejiang Sanmei Chemical IndustryLtd has been doing relatively well. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Is There Enough Growth For Zhejiang Sanmei Chemical IndustryLtd?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Zhejiang Sanmei Chemical IndustryLtd's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 38% gain to the company's bottom line. Pleasingly, EPS has also lifted 126% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 41% per year during the coming three years according to the five analysts following the company. That's shaping up to be materially higher than the 26% per year growth forecast for the broader market.

In light of this, it's understandable that Zhejiang Sanmei Chemical IndustryLtd's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

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 Zhejiang Sanmei Chemical IndustryLtd maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

Before you take the next step, you should know about the 1 warning sign for Zhejiang Sanmei Chemical IndustryLtd that we have uncovered.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.