Hangzhou DPtech Technologies Co.,Ltd.'s (SZSE:300768) price-to-earnings (or "P/E") ratio of 55.4x 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 26x and even P/E's below 16x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Recent times haven't been advantageous for Hangzhou DPtech TechnologiesLtd as its earnings have been falling quicker than most other companies. It might be that many expect the dismal earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be very nervous about the viability of the share price.

What Are Growth Metrics Telling Us About The High P/E?

In order to justify its P/E ratio, Hangzhou DPtech TechnologiesLtd would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered a frustrating 4.9% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 56% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 27% each year as estimated by the two analysts watching the company. That's shaping up to be materially higher than the 21% each year growth forecast for the broader market.

In light of this, it's understandable that Hangzhou DPtech TechnologiesLtd's 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 Bottom Line On Hangzhou DPtech TechnologiesLtd's P/E

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 Hangzhou DPtech TechnologiesLtd maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for Hangzhou DPtech TechnologiesLtd with six simple checks on some of these key factors.

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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