When close to half the companies in China have price-to-earnings ratios (or "P/E's") below 29x, you may consider Xianheng International Science&Technology Co., Ltd. (SHSE:605056) as a stock to potentially avoid with its 43.9x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

With earnings that are retreating more than the market's of late, Xianheng International Science&Technology has been very sluggish. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. If not, then existing shareholders may be very nervous about the viability of the share price.

Is There Enough Growth For Xianheng International Science&Technology?

In order to justify its P/E ratio, Xianheng International Science&Technology would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered a frustrating 39% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 66% overall. 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 49% each year as estimated by the dual analysts watching the company. That's shaping up to be materially higher than the 19% each year growth forecast for the broader market.

With this information, we can see why Xianheng International Science&Technology 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 Final Word

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 Xianheng International Science&Technology 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. It's hard to see the share price falling strongly in the near future under these circumstances.

Before you settle on your opinion, we've discovered 3 warning signs for Xianheng International Science&Technology that you should be aware of.

Of course, you might also be able to find a better stock than Xianheng International Science&Technology. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.