When close to half the companies in China have price-to-earnings ratios (or "P/E's") below 31x, you may consider Guangdong Marubi Biotechnology Co., Ltd. (SHSE:603983) as a stock to potentially avoid with its 42.3x 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.

Guangdong Marubi Biotechnology certainly has been doing a good job lately as it's been growing earnings more than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.

How Is Guangdong Marubi Biotechnology's Growth Trending?

In order to justify its P/E ratio, Guangdong Marubi Biotechnology would need to produce impressive growth in excess of the market.

If we review the last year of earnings growth, the company posted a terrific increase of 56%. Still, incredibly EPS has fallen 35% in total from three years ago, which is quite disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 23% per year as estimated by the analysts watching the company. With the market predicted to deliver 25% growth per annum, the company is positioned for a comparable earnings result.

With this information, we find it interesting that Guangdong Marubi Biotechnology is trading at a high P/E compared to the market. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

The Key Takeaway

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Guangdong Marubi Biotechnology currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Before you take the next step, you should know about the 1 warning sign for Guangdong Marubi Biotechnology that we have uncovered.

If you're unsure about the strength of Guangdong Marubi Biotechnology'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.