When close to half the companies in China have price-to-earnings ratios (or "P/E's") below 33x, you may consider Shanghai United Imaging Healthcare Co., Ltd. (SHSE:688271) as a stock to avoid entirely with its 63.3x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Shanghai United Imaging Healthcare has been struggling lately as its earnings have declined faster than most other companies. 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.

How Is Shanghai United Imaging Healthcare's Growth Trending?

In order to justify its P/E ratio, Shanghai United Imaging Healthcare would need to produce outstanding growth well in excess of the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 13%. The last three years don't look nice either as the company has shrunk EPS by 1.5% in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Turning to the outlook, the next year should generate growth of 64% as estimated by the analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 41%, which is noticeably less attractive.

In light of this, it's understandable that Shanghai United Imaging Healthcare'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.

What We Can Learn From Shanghai United Imaging Healthcare's P/E?

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.

As we suspected, our examination of Shanghai United Imaging Healthcare's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. 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 1 warning sign for Shanghai United Imaging Healthcare that you should be aware of.

You might be able to find a better investment than Shanghai United Imaging Healthcare. 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.