Jiangyin Jianghua Microelectronics Materials Co., Ltd (SHSE:603078) shareholders that were waiting for something to happen have been dealt a blow with a 26% 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 32% share price drop.

In spite of the heavy fall in price, Jiangyin Jianghua Microelectronics Materials may still be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 37.2x, since almost half of all companies in China have P/E ratios under 29x and even P/E's lower than 18x 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.

There hasn't been much to differentiate Jiangyin Jianghua Microelectronics Materials' and the market's retreating earnings lately. One possibility is that the P/E is high because investors think the company can turn things around and break free from the broader downward trend in earnings. If not, then existing shareholders may be a little nervous about the viability of the share price.

Check out our latest analysis for Jiangyin Jianghua Microelectronics Materials

Is There Enough Growth For Jiangyin Jianghua Microelectronics Materials?

Jiangyin Jianghua Microelectronics Materials' P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 2.6%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 115% in total over the last three years. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Turning to the outlook, the next year should generate growth of 60% as estimated by the three analysts watching the company. With the market only predicted to deliver 42%, the company is positioned for a stronger earnings result.

With this information, we can see why Jiangyin Jianghua Microelectronics Materials is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

Jiangyin Jianghua Microelectronics Materials' P/E hasn't come down all the way after its stock plunged. 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.

We've established that Jiangyin Jianghua Microelectronics Materials maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for Jiangyin Jianghua Microelectronics Materials with six simple checks will allow you to discover any risks that could be an issue.

If you're unsure about the strength of Jiangyin Jianghua Microelectronics Materials' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.