Yangzhou Seashine New Materials Co.,Ltd. (SZSE:300885) shares have had a horrible month, losing 27% after a relatively good period beforehand. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 21% share price drop.

Although its price has dipped substantially, Yangzhou Seashine New MaterialsLtd may still be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 55.4x, since almost half of all companies in China have P/E ratios under 29x and even P/E's lower than 18x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

As an illustration, earnings have deteriorated at Yangzhou Seashine New MaterialsLtd over the last year, which is not ideal at all. 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Yangzhou Seashine New MaterialsLtd

Does Growth Match The High P/E?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Yangzhou Seashine New MaterialsLtd's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 46% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 43% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 42% shows it's an unpleasant look.

With this information, we find it concerning that Yangzhou Seashine New MaterialsLtd 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 Key Takeaway

Even after such a strong price drop, Yangzhou Seashine New MaterialsLtd's P/E still exceeds the rest of the market significantly. 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.

We've established that Yangzhou Seashine New MaterialsLtd 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. 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.

Before you settle on your opinion, we've discovered 1 warning sign for Yangzhou Seashine New MaterialsLtd that you should be aware of.

If these risks are making you reconsider your opinion on Yangzhou Seashine New MaterialsLtd, 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.