Zhejiang Zhongcheng Packing Material Co., Ltd. (SZSE:002522) shareholders won't be pleased to see that the share price has had a very rough month, dropping 29% and undoing the prior period's positive performance. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 35% in that time.

In spite of the heavy fall in price, Zhejiang Zhongcheng Packing Material's price-to-earnings (or "P/E") ratio of 31.2x might still make it look like a sell right now compared to the market in China, where around half of the companies have P/E ratios below 26x and even P/E's below 16x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

For example, consider that Zhejiang Zhongcheng Packing Material's financial performance has been poor lately as its earnings have been in decline. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

How Is Zhejiang Zhongcheng Packing Material's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as high as Zhejiang Zhongcheng Packing Material's is when the company's growth is on track to outshine the market.

Retrospectively, the last year delivered a frustrating 37% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 11% in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

In contrast to the company, the rest of the market is expected to grow by 42% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

With this information, we find it concerning that Zhejiang Zhongcheng Packing Material is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. 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.

The Bottom Line On Zhejiang Zhongcheng Packing Material's P/E

There's still some solid strength behind Zhejiang Zhongcheng Packing Material's P/E, if not its share price lately. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Zhejiang Zhongcheng Packing Material currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. 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. If recent medium-term earnings trends continue, it will place 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 Zhejiang Zhongcheng Packing Material that you should be aware of.

If these risks are making you reconsider your opinion on Zhejiang Zhongcheng Packing Material, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.