Zhejiang Great Shengda Packaging Co.,Ltd. (SHSE:603687) shareholders won't be pleased to see that the share price has had a very rough month, dropping 26% and undoing the prior period's positive performance. The recent drop has obliterated the annual return, with the share price now down 7.0% over that longer period.

Even after such a large drop in price, Zhejiang Great Shengda PackagingLtd may still be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 50.6x, since almost half of all companies in China have P/E ratios under 31x and even P/E's lower than 19x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

While the market has experienced earnings growth lately, Zhejiang Great Shengda PackagingLtd's earnings have gone into reverse gear, which is not great. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

How Is Zhejiang Great Shengda PackagingLtd's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as steep as Zhejiang Great Shengda PackagingLtd's is when the company's growth is on track to outshine the market decidedly.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 27%. The last three years don't look nice either as the company has shrunk EPS by 75% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 26% per annum as estimated by the sole analyst watching the company. Meanwhile, the rest of the market is forecast to expand by 25% per annum, which is not materially different.

In light of this, it's curious that Zhejiang Great Shengda PackagingLtd's P/E sits above the majority of other companies. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

The Bottom Line On Zhejiang Great Shengda PackagingLtd's P/E

Even after such a strong price drop, Zhejiang Great Shengda PackagingLtd's P/E still exceeds the rest of the market significantly. 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 Great Shengda PackagingLtd currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Zhejiang Great Shengda PackagingLtd you should know about.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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