Guizhou Taiyong-Changzheng Technology Co.,Ltd. (SZSE:002927) shares have had a horrible month, losing 28% after a relatively good period beforehand. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 19% share price drop.

Even after such a large drop in price, Guizhou Taiyong-Changzheng TechnologyLtd may still be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 36x, since almost half of all companies in China have P/E ratios under 28x and even P/E's lower than 17x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Guizhou Taiyong-Changzheng TechnologyLtd has been doing a decent job lately as it's been growing earnings at a reasonable pace. It might be that many expect the reasonable earnings performance to beat most other companies over the coming period, which has increased investors' willingness to pay up for the stock. If not, then existing shareholders may be a little nervous about the viability of the share price.

Is There Enough Growth For Guizhou Taiyong-Changzheng TechnologyLtd?

The only time you'd be truly comfortable seeing a P/E as high as Guizhou Taiyong-Changzheng TechnologyLtd's is when the company's growth is on track to outshine the market.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 3.2% last year. Still, lamentably EPS has fallen 17% in aggregate from three years ago, which is disappointing. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 36% shows it's an unpleasant look.

In light of this, it's alarming that Guizhou Taiyong-Changzheng TechnologyLtd's P/E sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. 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.

What We Can Learn From Guizhou Taiyong-Changzheng TechnologyLtd's P/E?

There's still some solid strength behind Guizhou Taiyong-Changzheng TechnologyLtd's P/E, if not its share price lately. 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.

Our examination of Guizhou Taiyong-Changzheng TechnologyLtd 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. 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. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Guizhou Taiyong-Changzheng TechnologyLtd you should know about.

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).

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.

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