The Shenzhen Prince New Materials Co.,Ltd. (SZSE:002735) share price has done very well over the last month, posting an excellent gain of 27%. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 13% in the last twelve months.

Following the firm bounce in price, Shenzhen Prince New MaterialsLtd may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 77x, since almost half of all companies in China have P/E ratios under 36x and even P/E's lower than 21x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

The recently shrinking earnings for Shenzhen Prince New MaterialsLtd have been in line with the market. One possibility is that the P/E is high because investors think the company can turn things around and break free from the broader downward trend in earnings. If not, then existing shareholders may be a little nervous about the viability of the share price.

How Is Shenzhen Prince New MaterialsLtd's Growth Trending?

Shenzhen Prince New MaterialsLtd's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 2.6%. The last three years don't look nice either as the company has shrunk EPS by 54% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the sole analyst covering the company suggest earnings should grow by 110% over the next year. Meanwhile, the rest of the market is forecast to only expand by 41%, which is noticeably less attractive.

In light of this, it's understandable that Shenzhen Prince New MaterialsLtd's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

Shares in Shenzhen Prince New MaterialsLtd have built up some good momentum lately, which has really inflated its P/E. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Shenzhen Prince New MaterialsLtd's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

Having said that, be aware Shenzhen Prince New MaterialsLtd is showing 1 warning sign in our investment analysis, you should know about.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.