Chengdu KSW Technologies Co.,Ltd. (SHSE:688283) shares have had a horrible month, losing 28% 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 27% share price drop.

Even after such a large drop in price, given around half the companies in China have price-to-earnings ratios (or "P/E's") below 31x, you may still consider Chengdu KSW TechnologiesLtd as a stock to potentially avoid with its 38.9x 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.

Chengdu KSW TechnologiesLtd certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for Chengdu KSW TechnologiesLtd

How Is Chengdu KSW TechnologiesLtd's Growth Trending?

In order to justify its P/E ratio, Chengdu KSW TechnologiesLtd 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 36%. The latest three year period has also seen an excellent 100% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next year should generate growth of 37% as estimated by the dual analysts watching the company. With the market predicted to deliver 43% growth , the company is positioned for a weaker earnings result.

In light of this, it's alarming that Chengdu KSW TechnologiesLtd's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

What We Can Learn From Chengdu KSW TechnologiesLtd's P/E?

Chengdu KSW TechnologiesLtd's P/E hasn't come down all the way after its stock plunged. 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 Chengdu KSW TechnologiesLtd currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Before you take the next step, you should know about the 2 warning signs for Chengdu KSW TechnologiesLtd (1 can't be ignored!) that we have uncovered.

You might be able to find a better investment than Chengdu KSW TechnologiesLtd. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.