Unfortunately for some shareholders, the Zhejiang Sanmei Chemical Industry Co.,Ltd. (SHSE:603379) share price has dived 25% in the last thirty days, prolonging recent pain. Indeed, the recent drop has reduced its annual gain to a relatively sedate 8.6% over the last twelve months.

Although its price has dipped substantially, given close to half the companies in China have price-to-earnings ratios (or "P/E's") below 27x, you may still consider Zhejiang Sanmei Chemical IndustryLtd as a stock to avoid entirely with its 43.2x 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.

Recent times have been advantageous for Zhejiang Sanmei Chemical IndustryLtd as its earnings have been rising faster than most other companies. 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.

How Is Zhejiang Sanmei Chemical IndustryLtd's Growth Trending?

In order to justify its P/E ratio, Zhejiang Sanmei Chemical IndustryLtd would need to produce outstanding growth well in excess of the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 38% last year. Pleasingly, EPS has also lifted 126% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next three years should generate growth of 41% per year as estimated by the four analysts watching the company. With the market only predicted to deliver 24% each year, the company is positioned for a stronger earnings result.

With this information, we can see why Zhejiang Sanmei Chemical IndustryLtd is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Bottom Line On Zhejiang Sanmei Chemical IndustryLtd's P/E

Even after such a strong price drop, Zhejiang Sanmei Chemical IndustryLtd's P/E still exceeds the rest of the market significantly. 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.

We've established that Zhejiang Sanmei Chemical IndustryLtd maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. 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.

Plus, you should also learn about these 2 warning signs we've spotted with Zhejiang Sanmei Chemical IndustryLtd (including 1 which is a bit concerning).

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com