Shanghai Lujiazui Finance & Trade Zone Development Co.,Ltd. (SHSE:600663) shares have had a really impressive month, gaining 30% after a shaky period beforehand. Notwithstanding the latest gain, the annual share price return of 4.4% isn't as impressive.

Following the firm bounce in price, Shanghai Lujiazui Finance & Trade Zone DevelopmentLtd's price-to-earnings (or "P/E") ratio of 53.4x 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 28x and even P/E's below 17x 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.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Shanghai Lujiazui Finance & Trade Zone DevelopmentLtd has been doing quite well of late. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

How Is Shanghai Lujiazui Finance & Trade Zone DevelopmentLtd's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as steep as Shanghai Lujiazui Finance & Trade Zone DevelopmentLtd's is when the company's growth is on track to outshine the market decidedly.

If we review the last year of earnings growth, the company posted a terrific increase of 66%. However, this wasn't enough as the latest three year period has seen a very unpleasant 83% drop in EPS in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 2.8% per year as estimated by the two analysts watching the company. Meanwhile, the broader market is forecast to expand by 19% per annum, which paints a poor picture.

With this information, we find it concerning that Shanghai Lujiazui Finance & Trade Zone DevelopmentLtd is trading at a P/E higher than the market. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as these declining earnings are likely to weigh heavily on the share price eventually.

The Final Word

Shanghai Lujiazui Finance & Trade Zone DevelopmentLtd's P/E is flying high just like its stock has during the last month. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of Shanghai Lujiazui Finance & Trade Zone DevelopmentLtd's analyst forecasts revealed that its outlook for shrinking earnings isn't impacting its high P/E anywhere near as much as we would have predicted. When we see a poor outlook with earnings heading backwards, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You need to take note of risks, for example - Shanghai Lujiazui Finance & Trade Zone DevelopmentLtd has 3 warning signs (and 1 which can't be ignored) we think you should know about.

You might be able to find a better investment than Shanghai Lujiazui Finance & Trade Zone DevelopmentLtd. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.