The Zhejiang Yonggui Electric Equipment Co., Ltd. (SZSE:300351) share price has fared very poorly over the last month, falling by a substantial 33%. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 26% share price drop.

In spite of the heavy fall in price, Zhejiang Yonggui Electric Equipment may still be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 39.6x, since almost half of all companies in China have P/E ratios under 25x and even P/E's lower than 15x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

Recent times haven't been advantageous for Zhejiang Yonggui Electric Equipment as its earnings have been falling quicker than most other companies. It might be that many expect the dismal earnings performance to recover substantially, 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.

What Are Growth Metrics Telling Us About The High P/E?

In order to justify its P/E ratio, Zhejiang Yonggui Electric Equipment 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 17%. At least EPS has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 81% during the coming year according to the four analysts following the company. With the market only predicted to deliver 41%, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Zhejiang Yonggui Electric Equipment's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

Even after such a strong price drop, Zhejiang Yonggui Electric Equipment's P/E still exceeds the rest of the market significantly. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Zhejiang Yonggui Electric Equipment maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

Before you take the next step, you should know about the 1 warning sign for Zhejiang Yonggui Electric Equipment that we have uncovered.

You might be able to find a better investment than Zhejiang Yonggui Electric Equipment. 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.