With a price-to-earnings (or "P/E") ratio of 48.9x Dayu Irrigation Group Co.,Ltd. (SZSE:300021) may be sending bearish signals at the moment, given that almost half of all companies in China have P/E ratios under 32x and even P/E's lower than 19x are not unusual. 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.

With earnings that are retreating more than the market's of late, Dayu Irrigation GroupLtd has been very sluggish. It might be that many expect the dismal earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be very nervous about the viability of the share price.

Check out our latest analysis for Dayu Irrigation GroupLtd

How Is Dayu Irrigation GroupLtd's Growth Trending?

In order to justify its P/E ratio, Dayu Irrigation GroupLtd would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered a frustrating 41% 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 1.7% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Shifting to the future, estimates from the lone analyst covering the company suggest earnings should grow by 46% per year over the next three years. Meanwhile, the rest of the market is forecast to only expand by 25% each year, which is noticeably less attractive.

In light of this, it's understandable that Dayu Irrigation GroupLtd's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Dayu Irrigation GroupLtd's P/E

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Dayu Irrigation GroupLtd maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Dayu Irrigation GroupLtd that you should be aware of.

If you're unsure about the strength of Dayu Irrigation GroupLtd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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.