The Adicon Holdings Limited (HKG:9860) share price has fared very poorly over the last month, falling by a substantial 28%. Longer-term shareholders will rue the drop in the share price, since it's now virtually flat for the year after a promising few quarters.

Even after such a large drop in price, Adicon Holdings may still be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 24.3x, since almost half of all companies in Hong Kong have P/E ratios under 9x and even P/E's lower than 5x 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.

Adicon Holdings 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. If not, then existing shareholders may be extremely nervous about the viability of the share price.

Is There Enough Growth For Adicon Holdings?

The only time you'd be truly comfortable seeing a P/E as steep as Adicon Holdings' is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered a frustrating 67% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 34% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Shifting to the future, estimates from the six analysts covering the company suggest earnings should grow by 29% per year over the next three years. That's shaping up to be materially higher than the 16% per annum growth forecast for the broader market.

In light of this, it's understandable that Adicon Holdings' 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.

What We Can Learn From Adicon Holdings' P/E?

Even after such a strong price drop, Adicon Holdings' P/E still exceeds the rest of the market significantly. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Adicon Holdings' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. 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.

You should always think about risks. Case in point, we've spotted 1 warning sign for Adicon Holdings you should be aware of.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.