Hithink RoyalFlush Information Network Co., Ltd. (SZSE:300033) shareholders won't be pleased to see that the share price has had a very rough month, dropping 27% and undoing the prior period's positive performance. The recent drop has obliterated the annual return, with the share price now down 6.5% over that longer period.

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 29x, you may still consider Hithink RoyalFlush Information Network as a stock to potentially avoid with its 39.2x 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.

With earnings that are retreating more than the market's of late, Hithink RoyalFlush Information Network has been very sluggish. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Hithink RoyalFlush Information Network

Does Growth Match The High P/E?

The only time you'd be truly comfortable seeing a P/E as high as Hithink RoyalFlush Information Network's is when the company's growth is on track to outshine the market.

Retrospectively, the last year delivered a frustrating 13% decrease to the company's bottom line. Regardless, EPS has managed to lift by a handy 30% in aggregate from three years ago, thanks to the earlier period of growth. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been mostly respectable for the company.

Looking ahead now, EPS is anticipated to climb by 25% during the coming year according to the analysts following the company. Meanwhile, the rest of the market is forecast to expand by 42%, which is noticeably more attractive.

In light of this, it's alarming that Hithink RoyalFlush Information Network's P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

The Bottom Line On Hithink RoyalFlush Information Network's P/E

Hithink RoyalFlush Information Network's P/E hasn't come down all the way after its stock plunged. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of Hithink RoyalFlush Information Network's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. 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. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Hithink RoyalFlush Information Network that you should be aware of.

You might be able to find a better investment than Hithink RoyalFlush Information Network. 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.