CETC Acoustic-Optic-Electronic Technology Inc. (SHSE:600877) shareholders that were waiting for something to happen have been dealt a blow with a 33% share price drop in the last month. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 44% in that time.

Although its price has dipped substantially, CETC Acoustic-Optic-Electronic Technology may still be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 79.1x, since almost half of all companies in China have P/E ratios under 26x and even P/E's lower than 16x 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.

With earnings growth that's superior to most other companies of late, CETC Acoustic-Optic-Electronic Technology has been doing relatively well. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for CETC Acoustic-Optic-Electronic Technology

Does Growth Match The High P/E?

There's an inherent assumption that a company should far outperform the market for P/E ratios like CETC Acoustic-Optic-Electronic Technology's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 60%. Still, incredibly EPS has fallen 47% in total from three years ago, which is quite disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the only analyst covering the company suggest earnings should grow by 18% per year over the next three years. Meanwhile, the rest of the market is forecast to expand by 26% per annum, which is noticeably more attractive.

With this information, we find it concerning that CETC Acoustic-Optic-Electronic Technology is trading at a P/E higher than the market. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

What We Can Learn From CETC Acoustic-Optic-Electronic Technology's P/E?

Even after such a strong price drop, CETC Acoustic-Optic-Electronic Technology's P/E still exceeds the rest of the market significantly. 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 CETC Acoustic-Optic-Electronic Technology currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

You should always think about risks. Case in point, we've spotted 4 warning signs for CETC Acoustic-Optic-Electronic Technology you should be aware of, and 1 of them is potentially serious.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a P/E below 20x.

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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.