When close to half the companies in China have price-to-earnings ratios (or "P/E's") below 35x, you may consider Vcanbio Cell & Gene Engineering Corp., Ltd (SHSE:600645) as a stock to avoid entirely with its 72.4x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Vcanbio Cell & Gene Engineering certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors' willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Vcanbio Cell & Gene Engineering

Is There Enough Growth For Vcanbio Cell & Gene Engineering?

Vcanbio Cell & Gene Engineering'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.

Taking a look back first, we see that the company grew earnings per share by an impressive 70% last year. The latest three year period has also seen an excellent 49% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

This is in contrast to the rest of the market, which is expected to grow by 43% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it concerning that Vcanbio Cell & Gene Engineering is trading at a P/E higher than the market. 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. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Bottom Line On Vcanbio Cell & Gene Engineering's P/E

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.

We've established that Vcanbio Cell & Gene Engineering currently trades on a much higher than expected P/E since its recent three-year growth is lower than the wider market forecast. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for Vcanbio Cell & Gene Engineering with six simple checks will allow you to discover any risks that could be an issue.

If these risks are making you reconsider your opinion on Vcanbio Cell & Gene Engineering, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.