When close to half the companies in China have price-to-earnings ratios (or "P/E's") below 29x, you may consider ShanDongDenghai Seeds Co.,Ltd (SZSE:002041) as a stock to potentially avoid with its 41.3x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

Recent times have been pleasing for ShanDongDenghai SeedsLtd as its earnings have risen in spite of the market's earnings going into reverse. 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 ShanDongDenghai SeedsLtd

Does Growth Match The High P/E?

There's an inherent assumption that a company should outperform the market for P/E ratios like ShanDongDenghai SeedsLtd's to be considered reasonable.

If we review the last year of earnings growth, the company posted a worthy increase of 3.6%. Pleasingly, EPS has also lifted 169% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the ten analysts covering the company suggest earnings should grow by 51% over the next year. Meanwhile, the rest of the market is forecast to only expand by 42%, which is noticeably less attractive.

With this information, we can see why ShanDongDenghai SeedsLtd is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From ShanDongDenghai SeedsLtd's P/E?

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of ShanDongDenghai SeedsLtd's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for ShanDongDenghai SeedsLtd that you should be aware of.

If you're unsure about the strength of ShanDongDenghai SeedsLtd'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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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.