AAC Technologies Holdings Inc. (HKG:2018) shares have had a horrible month, losing 34% after a relatively good period beforehand. Looking at the bigger picture, even after this poor month the stock is up 28% in the last year.

Although its price has dipped substantially, given close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") below 10x, you may still consider AAC Technologies Holdings as a stock to avoid entirely with its 20.5x P/E ratio. 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.

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With earnings growth that's superior to most other companies of late, AAC Technologies Holdings has been doing relatively well. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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Does Growth Match The High P/E?

AAC Technologies Holdings' P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

If we review the last year of earnings growth, the company posted a terrific increase of 144%. The strong recent performance means it was also able to grow EPS by 39% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 22% per annum during the coming three years according to the analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 14% per year, which is noticeably less attractive.

With this information, we can see why AAC Technologies Holdings is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On AAC Technologies Holdings' P/E

Even after such a strong price drop, AAC Technologies Holdings' P/E still exceeds the rest of the market significantly. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that AAC Technologies Holdings maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for AAC Technologies Holdings with six simple checks on some of these key factors.

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 low P/E.

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