Zhangjiagang Haiguo New Energy Equipment Manufacturing Co., Ltd. (SZSE:301063) shareholders have had their patience rewarded with a 38% share price jump in the last month. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 27% in the last twelve months.

After such a large jump in price, given close to half the companies in China have price-to-earnings ratios (or "P/E's") below 33x, you may consider Zhangjiagang Haiguo New Energy Equipment Manufacturing as a stock to avoid entirely with its 57x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

As an illustration, earnings have deteriorated at Zhangjiagang Haiguo New Energy Equipment Manufacturing over the last year, which is not ideal at all. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Does Growth Match The High P/E?

The only time you'd be truly comfortable seeing a P/E as steep as Zhangjiagang Haiguo New Energy Equipment Manufacturing's is when the company's growth is on track to outshine the market decidedly.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 72%. The last three years don't look nice either as the company has shrunk EPS by 82% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

In contrast to the company, the rest of the market is expected to grow by 37% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

With this information, we find it concerning that Zhangjiagang Haiguo New Energy Equipment Manufacturing is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

The Bottom Line On Zhangjiagang Haiguo New Energy Equipment Manufacturing's P/E

Zhangjiagang Haiguo New Energy Equipment Manufacturing's P/E is flying high just like its stock has during the last month. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Zhangjiagang Haiguo New Energy Equipment Manufacturing currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Before you settle on your opinion, we've discovered 5 warning signs for Zhangjiagang Haiguo New Energy Equipment Manufacturing (2 are concerning!) that you should be aware of.

If you're unsure about the strength of Zhangjiagang Haiguo New Energy Equipment Manufacturing's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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