With a price-to-earnings (or "P/E") ratio of 70.2x Shanghai Sinyang Semiconductor Materials Co., Ltd. (SZSE:300236) may be sending very bearish signals at the moment, given that almost half of all companies in China have P/E ratios under 34x and even P/E's lower than 20x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Shanghai Sinyang Semiconductor Materials certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Shanghai Sinyang Semiconductor Materials

Is There Enough Growth For Shanghai Sinyang Semiconductor Materials?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Shanghai Sinyang Semiconductor Materials' to be considered reasonable.

Retrospectively, the last year delivered an exceptional 362% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 47% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next year should generate growth of 24% as estimated by the sole analyst watching the company. With the market predicted to deliver 44% growth , the company is positioned for a weaker earnings result.

In light of this, it's alarming that Shanghai Sinyang Semiconductor Materials' P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

The Final Word

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.

We've established that Shanghai Sinyang Semiconductor Materials currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Shanghai Sinyang Semiconductor Materials that you should be aware of.

If you're unsure about the strength of Shanghai Sinyang Semiconductor Materials' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.