When close to half the companies in China have price-to-earnings ratios (or "P/E's") below 36x, you may consider ShenZhen Click Technology Co.,LTD. (SZSE:002782) as a stock to potentially avoid with its 46x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

With earnings that are retreating more than the market's of late, ShenZhen Click TechnologyLTD has been very sluggish. 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.

Is There Enough Growth For ShenZhen Click TechnologyLTD?

The only time you'd be truly comfortable seeing a P/E as high as ShenZhen Click TechnologyLTD's is when the company's growth is on track to outshine the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 26%. Even so, admirably EPS has lifted 59% in aggregate from three years ago, notwithstanding the last 12 months. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Shifting to the future, estimates from the only analyst covering the company suggest earnings should grow by 92% over the next year. That's shaping up to be materially higher than the 38% growth forecast for the broader market.

With this information, we can see why ShenZhen Click TechnologyLTD is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that ShenZhen Click TechnologyLTD 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. Unless these conditions change, they will continue to provide strong support to the share price.

Plus, you should also learn about these 2 warning signs we've spotted with ShenZhen Click TechnologyLTD.

If you're unsure about the strength of ShenZhen Click TechnologyLTD'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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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.