Guilin Layn Natural Ingredients Corp.'s (SZSE:002166) price-to-earnings (or "P/E") ratio of 65.1x might make it look like a strong sell right now compared to the market in China, where around half of the companies have P/E ratios below 32x and even P/E's below 19x are quite common. 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.

Guilin Layn Natural Ingredients hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.

How Is Guilin Layn Natural Ingredients' Growth Trending?

Guilin Layn Natural Ingredients' P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

Retrospectively, the last year delivered a frustrating 52% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 24% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the sole analyst covering the company suggest earnings should grow by 55% per annum over the next three years. Meanwhile, the rest of the market is forecast to only expand by 23% per year, which is noticeably less attractive.

In light of this, it's understandable that Guilin Layn Natural Ingredients' P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Key Takeaway

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Guilin Layn Natural Ingredients' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

You should always think about risks. Case in point, we've spotted 3 warning signs for Guilin Layn Natural Ingredients you should be aware of, and 1 of them is concerning.

If you're unsure about the strength of Guilin Layn Natural Ingredients' 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.