When close to half the companies in China have price-to-earnings ratios (or "P/E's") below 26x, you may consider Shanghai Zhangjiang Hi-Tech Park Development Co., Ltd. (SHSE:600895) as a stock to potentially avoid with its 30.2x 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.

While the market has experienced earnings growth lately, Shanghai Zhangjiang Hi-Tech Park Development's earnings have gone into reverse gear, which is not great. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

Does Growth Match The High P/E?

In order to justify its P/E ratio, Shanghai Zhangjiang Hi-Tech Park Development would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered a frustrating 30% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 58% overall. 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 three years should generate growth of 12% per year as estimated by the two analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 23% each year, which is noticeably more attractive.

In light of this, it's alarming that Shanghai Zhangjiang Hi-Tech Park Development'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 Shanghai Zhangjiang Hi-Tech Park Development's P/E

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Shanghai Zhangjiang Hi-Tech Park Development's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

There are also other vital risk factors to consider and we've discovered 4 warning signs for Shanghai Zhangjiang Hi-Tech Park Development (1 can't be ignored!) that you should be aware of before investing here.

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.