There wouldn't be many who think Rastar Environmental Protection Materials Co., Ltd.'s (SZSE:300834) price-to-earnings (or "P/E") ratio of 36.2x is worth a mention when the median P/E in China is similar at about 35x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

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Rastar Environmental Protection Materials has been doing a decent job lately as it's been growing earnings at a reasonable pace. It might be that many expect the respectable earnings performance to only match most other companies over the coming period, which has kept the P/E from rising. If not, then at least existing shareholders probably aren't too pessimistic about the future direction of the share price.

Does Growth Match The P/E?

The only time you'd be comfortable seeing a P/E like Rastar Environmental Protection Materials' is when the company's growth is tracking the market closely.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 3.7% last year. However, this wasn't enough as the latest three year period has seen an unpleasant 77% overall drop in EPS. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

In contrast to the company, the rest of the market is expected to grow by 34% 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 Rastar Environmental Protection Materials is trading at a fairly similar P/E to the market. Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now. There's a 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.

What We Can Learn From Rastar Environmental Protection Materials' P/E?

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 Rastar Environmental Protection Materials currently trades on a higher than expected P/E since its recent earnings have been in decline over the medium-term. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Rastar Environmental Protection Materials (of which 1 is concerning!) you should know about.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.