There wouldn't be many who think Shanghai Ganglian E-Commerce Holdings Co., Ltd.'s (SZSE:300226) price-to-earnings (or "P/E") ratio of 32x is worth a mention when the median P/E in China is similar at about 31x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Shanghai Ganglian E-Commerce Holdings has been doing quite well of late. One possibility is that the P/E is moderate because investors think the company's earnings will be less resilient moving forward. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

View our latest analysis for Shanghai Ganglian E-Commerce Holdings

Does Growth Match The P/E?

The only time you'd be comfortable seeing a P/E like Shanghai Ganglian E-Commerce Holdings' is when the company's growth is tracking the market closely.

If we review the last year of earnings growth, the company posted a terrific increase of 45%. EPS has also lifted 24% in aggregate from three years ago, mostly thanks to the last 12 months of growth. 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 22% as estimated by the five analysts watching the company. With the market predicted to deliver 42% growth , the company is positioned for a weaker earnings result.

With this information, we find it interesting that Shanghai Ganglian E-Commerce Holdings is trading at a fairly similar P/E to the market. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.

The Final Word

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 Shanghai Ganglian E-Commerce Holdings currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

Before you settle on your opinion, we've discovered 1 warning sign for Shanghai Ganglian E-Commerce Holdings that you should be aware of.

If you're unsure about the strength of Shanghai Ganglian E-Commerce Holdings' 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.