With a median price-to-earnings (or "P/E") ratio of close to 26x in China, you could be forgiven for feeling indifferent about Shenzhen Weiguang Biological Products Co., Ltd.'s (SZSE:002880) P/E ratio of 26.8x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

Shenzhen Weiguang Biological Products certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

Is There Some Growth For Shenzhen Weiguang Biological Products?

The only time you'd be comfortable seeing a P/E like Shenzhen Weiguang Biological Products' is when the company's growth is tracking the market closely.

Taking a look back first, we see that the company grew earnings per share by an impressive 59% last year. EPS has also lifted 18% in aggregate from three years ago, mostly thanks to the last 12 months of growth. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 14% per annum as estimated by the lone analyst watching the company. With the market predicted to deliver 23% growth per year, the company is positioned for a weaker earnings result.

In light of this, it's curious that Shenzhen Weiguang Biological Products' P/E sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Key Takeaway

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 Shenzhen Weiguang Biological Products 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. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Shenzhen Weiguang Biological Products you should know about.

If these risks are making you reconsider your opinion on Shenzhen Weiguang Biological Products, 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.