To the annoyance of some shareholders, Jiangsu Sidike New Materials Science & Technology Co., Ltd. (SZSE:300806) shares are down a considerable 26% in the last month, which continues a horrid run for the company. For any long-term shareholders, the last month ends a year to forget by locking in a 56% share price decline.

In spite of the heavy fall in price, Jiangsu Sidike New Materials Science & Technology may still be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 39.6x, since almost half of all companies in China have P/E ratios under 29x and even P/E's lower than 18x 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 as high as it is.

Jiangsu Sidike New Materials Science & Technology hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It might be that many expect the dour 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.

Does Growth Match The High P/E?

The only time you'd be truly comfortable seeing a P/E as high as Jiangsu Sidike New Materials Science & Technology's is when the company's growth is on track to outshine the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 67%. This means it has also seen a slide in earnings over the longer-term as EPS is down 50% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next year should generate growth of 172% as estimated by the lone analyst watching the company. Meanwhile, the rest of the market is forecast to only expand by 36%, which is noticeably less attractive.

In light of this, it's understandable that Jiangsu Sidike New Materials Science & Technology's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Key Takeaway

Jiangsu Sidike New Materials Science & Technology's P/E hasn't come down all the way after its stock plunged. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Jiangsu Sidike New Materials Science & Technology 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.

It is also worth noting that we have found 4 warning signs for Jiangsu Sidike New Materials Science & Technology (2 can't be ignored!) that you need to take into consideration.

If you're unsure about the strength of Jiangsu Sidike New Materials Science & Technology's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.