Shandong Swan CottonIndustrial Machinery Stock Co.,Ltd. (SHSE:603029) shares have had a horrible month, losing 29% after a relatively good period beforehand. The last month has meant the stock is now only up 5.8% during the last year.

Although its price has dipped substantially, given close to half the companies in China have price-to-earnings ratios (or "P/E's") below 27x, you may still consider Shandong Swan CottonIndustrial Machinery StockLtd as a stock to potentially avoid with its 33.9x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Shandong Swan CottonIndustrial Machinery StockLtd certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors' willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Shandong Swan CottonIndustrial Machinery StockLtd

How Is Shandong Swan CottonIndustrial Machinery StockLtd's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as high as Shandong Swan CottonIndustrial Machinery StockLtd's is when the company's growth is on track to outshine the market.

Retrospectively, the last year delivered an exceptional 160% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 142% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

It's interesting to note that the rest of the market is similarly expected to grow by 35% over the next year, which is fairly even with the company's recent medium-term annualised growth rates.

With this information, we find it interesting that Shandong Swan CottonIndustrial Machinery StockLtd is trading at a high P/E compared to the market. Apparently many investors in the company are more bullish than recent times would indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as a continuation of recent earnings trends would weigh down the share price eventually.

The Key Takeaway

Shandong Swan CottonIndustrial Machinery StockLtd's P/E hasn't come down all the way after its stock plunged. 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.

Our examination of Shandong Swan CottonIndustrial Machinery StockLtd revealed its three-year earnings trends aren't impacting its high P/E as much as we would have predicted, given they look similar to current market expectations. When we see average earnings with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

It is also worth noting that we have found 3 warning signs for Shandong Swan CottonIndustrial Machinery StockLtd that you need to take into consideration.

If these risks are making you reconsider your opinion on Shandong Swan CottonIndustrial Machinery StockLtd, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.