Shandong Hiking International Co.,Ltd (SHSE:600735) shareholders that were waiting for something to happen have been dealt a blow with a 27% share price drop in the last month. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 31% share price drop.

Even after such a large drop in price, Shandong Hiking InternationalLtd's price-to-earnings (or "P/E") ratio of 32.8x might still make it look like a sell right now compared to the market in China, where around half of the companies have P/E ratios below 27x and even P/E's below 17x are quite common. 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.

For example, consider that Shandong Hiking InternationalLtd's financial performance has been poor lately as its earnings have been in decline. 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.

How Is Shandong Hiking InternationalLtd's Growth Trending?

In order to justify its P/E ratio, Shandong Hiking InternationalLtd would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered a frustrating 11% decrease to the company's bottom line. However, a few very strong years before that means that it was still able to grow EPS by an impressive 36% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

This is in contrast to the rest of the market, which is expected to grow by 41% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it concerning that Shandong Hiking InternationalLtd is trading at a P/E higher than the market. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. 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

There's still some solid strength behind Shandong Hiking InternationalLtd's P/E, if not its share price lately. 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 Shandong Hiking InternationalLtd currently trades on a much higher than expected P/E since its recent three-year growth is lower than the wider market forecast. Right now we are increasingly uncomfortable with the high P/E as this earnings performance isn't likely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Having said that, be aware Shandong Hiking InternationalLtd is showing 2 warning signs in our investment analysis, and 1 of those is significant.

Of course, you might also be able to find a better stock than Shandong Hiking InternationalLtd. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.