When close to half the companies in China have price-to-earnings ratios (or "P/E's") below 33x, you may consider Red Avenue New Materials Group Co., Ltd. (SHSE:603650) as a stock to potentially avoid with its 43.4x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Red Avenue New Materials Group certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Red Avenue New Materials Group

How Is Red Avenue New Materials Group's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as high as Red Avenue New Materials Group's is when the company's growth is on track to outshine the market.

Retrospectively, the last year delivered an exceptional 43% gain to the company's bottom line. The latest three year period has also seen a 21% overall rise in EPS, aided extensively by its short-term performance. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

Turning to the outlook, the next year should generate growth of 18% as estimated by the four analysts watching the company. With the market predicted to deliver 43% growth , the company is positioned for a weaker earnings result.

With this information, we find it concerning that Red Avenue New Materials Group is trading at a P/E higher than the market. 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 Red Avenue New Materials Group's P/E

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.

We've established that Red Avenue New Materials Group currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Having said that, be aware Red Avenue New Materials Group is showing 1 warning sign in our investment analysis, you should know about.

If these risks are making you reconsider your opinion on Red Avenue New Materials Group, 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.