The Hunan Heshun Petroleum Co.,Ltd. (SHSE:603353) share price has softened a substantial 26% over the previous 30 days, handing back much of the gains the stock has made lately. Looking at the bigger picture, even after this poor month the stock is up 48% in the last year.

Although its price has dipped substantially, Hunan Heshun PetroleumLtd's price-to-earnings (or "P/E") ratio of 67x might still 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 33x and even P/E's below 19x 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.

For example, consider that Hunan Heshun PetroleumLtd's financial performance has been poor lately as its earnings have been in decline. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.

View our latest analysis for Hunan Heshun PetroleumLtd

Is There Enough Growth For Hunan Heshun PetroleumLtd?

In order to justify its P/E ratio, Hunan Heshun PetroleumLtd would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered a frustrating 9.5% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 64% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 44% shows it's an unpleasant look.

With this information, we find it concerning that Hunan Heshun PetroleumLtd is trading at a P/E higher than the market. 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.

The Key Takeaway

Even after such a strong price drop, Hunan Heshun PetroleumLtd's P/E still exceeds the rest of the market significantly. 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 Hunan Heshun PetroleumLtd currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. 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.

There are also other vital risk factors to consider and we've discovered 4 warning signs for Hunan Heshun PetroleumLtd (2 are potentially serious!) that you should be aware of before investing here.

If you're unsure about the strength of Hunan Heshun PetroleumLtd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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