The Guangdong Sunwill Precising Plastic Co.,Ltd (SZSE:002676) share price has fared very poorly over the last month, falling by a substantial 26%. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 16% in that time.

Although its price has dipped substantially, Guangdong Sunwill Precising PlasticLtd may still be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 70x, since almost half of all companies in China have P/E ratios under 27x and even P/E's lower than 17x 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 so lofty.

With earnings growth that's exceedingly strong of late, Guangdong Sunwill Precising PlasticLtd has been doing very well. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. If not, then existing shareholders might be a little nervous about the viability of the share price.

How Is Guangdong Sunwill Precising PlasticLtd's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as steep as Guangdong Sunwill Precising PlasticLtd's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered an exceptional 64% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 43% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

This is in contrast to the rest of the market, which is expected to grow by 41% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's alarming that Guangdong Sunwill Precising PlasticLtd's P/E sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Final Word

A significant share price dive has done very little to deflate Guangdong Sunwill Precising PlasticLtd's very lofty 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 Guangdong Sunwill Precising PlasticLtd revealed its three-year earnings trends aren't impacting its high P/E anywhere near as much as we would have predicted, given they look worse than current market expectations. When we see weak earnings with slower than market growth, 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 1 warning sign for Guangdong Sunwill Precising PlasticLtd that we have uncovered.

Of course, you might also be able to find a better stock than Guangdong Sunwill Precising PlasticLtd. 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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