When close to half the companies in China have price-to-earnings ratios (or "P/E's") below 32x, you may consider Shaanxi Beiyuan Chemical Industry Group Co., Ltd. (SHSE:601568) as a stock to potentially avoid with its 37.4x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

For instance, Shaanxi Beiyuan Chemical Industry Group's receding earnings in recent times would have to be some food for thought. 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.

Check out our latest analysis for Shaanxi Beiyuan Chemical Industry Group

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

In order to justify its P/E ratio, Shaanxi Beiyuan Chemical Industry Group would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered a frustrating 71% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 72% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 43% shows it's an unpleasant look.

In light of this, it's alarming that Shaanxi Beiyuan Chemical Industry Group'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 Shaanxi Beiyuan Chemical Industry Group's P/E?

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.

Our examination of Shaanxi Beiyuan Chemical Industry Group 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. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Plus, you should also learn about these 8 warning signs we've spotted with Shaanxi Beiyuan Chemical Industry Group (including 4 which are a bit concerning).

Of course, you might also be able to find a better stock than Shaanxi Beiyuan Chemical Industry Group. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.