When close to half the companies in China have price-to-earnings ratios (or "P/E's") below 29x, you may consider Jiangxi Huangshanghuang Group Food Co., Ltd. (SZSE:002695) as a stock to avoid entirely with its 58.1x 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 so lofty.

With earnings growth that's superior to most other companies of late, Jiangxi Huangshanghuang Group Food has been doing relatively well. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.

Does Growth Match The High P/E?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Jiangxi Huangshanghuang Group Food's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 101% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 78% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 123% during the coming year according to the sole analyst following the company. With the market only predicted to deliver 38%, the company is positioned for a stronger earnings result.

With this information, we can see why Jiangxi Huangshanghuang Group Food is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

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 Jiangxi Huangshanghuang Group Food's 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.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Jiangxi Huangshanghuang Group Food (at least 1 which doesn't sit too well with us), and understanding them should be part of your investment process.

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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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.