The Anhui Tongyuan Environment Energy Saving Co.,Ltd (SHSE:688679) share price has fared very poorly over the last month, falling by a substantial 28%. 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, Anhui Tongyuan Environment Energy SavingLtd's price-to-earnings (or "P/E") ratio of 33.1x 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. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

For example, consider that Anhui Tongyuan Environment Energy SavingLtd's financial performance has been poor lately as its earnings have been in decline. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.

How Is Anhui Tongyuan Environment Energy SavingLtd's Growth Trending?

There's an inherent assumption that a company should outperform the market for P/E ratios like Anhui Tongyuan Environment Energy SavingLtd's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 33% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 68% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 41% shows it's an unpleasant look.

With this information, we find it concerning that Anhui Tongyuan Environment Energy SavingLtd 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.

What We Can Learn From Anhui Tongyuan Environment Energy SavingLtd's P/E?

Anhui Tongyuan Environment Energy SavingLtd's P/E hasn't come down all the way after its stock plunged. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of Anhui Tongyuan Environment Energy SavingLtd revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. 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 take the next step, you should know about the 3 warning signs for Anhui Tongyuan Environment Energy SavingLtd (1 is a bit unpleasant!) that we have uncovered.

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.