Zhangjiagang Haiguo New Energy Equipment Manufacturing Co., Ltd. (SZSE:301063) shareholders have had their patience rewarded with a 29% share price jump in the last month. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 30% over that time.

Following the firm bounce in price, Zhangjiagang Haiguo New Energy Equipment Manufacturing's price-to-earnings (or "P/E") ratio of 37.8x might 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 28x and even P/E's below 17x are quite common. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

As an illustration, earnings have deteriorated at Zhangjiagang Haiguo New Energy Equipment Manufacturing over the last year, which is not ideal at all. 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

How Is Zhangjiagang Haiguo New Energy Equipment Manufacturing's Growth Trending?

There's an inherent assumption that a company should outperform the market for P/E ratios like Zhangjiagang Haiguo New Energy Equipment Manufacturing's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 55% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 70% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

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 Zhangjiagang Haiguo New Energy Equipment Manufacturing'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 Zhangjiagang Haiguo New Energy Equipment Manufacturing's P/E

Zhangjiagang Haiguo New Energy Equipment Manufacturing's P/E is getting right up there since its shares have risen strongly. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of Zhangjiagang Haiguo New Energy Equipment Manufacturing 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 5 warning signs for Zhangjiagang Haiguo New Energy Equipment Manufacturing (of which 1 makes us a bit uncomfortable!) you should know about.

You might be able to find a better investment than Zhangjiagang Haiguo New Energy Equipment Manufacturing. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.

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