Daqian Ecology&Environment Group Co.,Ltd. (SHSE:603955) shareholders that were waiting for something to happen have been dealt a blow with a 34% 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 47% share price drop.

Although its price has dipped substantially, given close to half the companies in China have price-to-earnings ratios (or "P/E's") below 26x, you may still consider Daqian Ecology&Environment GroupLtd as a stock to avoid entirely with its 75.3x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

For example, consider that Daqian Ecology&Environment GroupLtd'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.

What Are Growth Metrics Telling Us About The High P/E?

In order to justify its P/E ratio, Daqian Ecology&Environment GroupLtd would need to produce outstanding growth well in excess of the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 32%. This means it has also seen a slide in earnings over the longer-term as EPS is down 84% 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.

Comparing that to the market, which is predicted to deliver 41% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

In light of this, it's alarming that Daqian Ecology&Environment GroupLtd's P/E sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

What We Can Learn From Daqian Ecology&Environment GroupLtd's P/E?

Daqian Ecology&Environment GroupLtd's shares may have retreated, but its P/E is still flying high. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of Daqian Ecology&Environment GroupLtd 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. Unless the recent medium-term 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 Daqian Ecology&Environment GroupLtd that we have uncovered.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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