Ningbo Orient Wires & Cables Co.,Ltd.'s (SHSE:603606) price-to-earnings (or "P/E") ratio of 29.6x might make it look like a sell right now compared to the market in China, where around half of the companies have P/E ratios below 26x and even P/E's below 16x are quite common. 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.

With earnings that are retreating more than the market's of late, Ningbo Orient Wires & CablesLtd has been very sluggish. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. If not, then existing shareholders may be very nervous about the viability of the share price.

Does Growth Match The High P/E?

There's an inherent assumption that a company should outperform the market for P/E ratios like Ningbo Orient Wires & CablesLtd's to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 4.5%. That put a dampener on the good run it was having over the longer-term as its three-year EPS growth is still a noteworthy 15% in total. So we can start by confirming that the company has generally done a good job of growing earnings over that time, even though it had some hiccups along the way.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 65% over the next year. Meanwhile, the rest of the market is forecast to only expand by 41%, which is noticeably less attractive.

In light of this, it's understandable that Ningbo Orient Wires & CablesLtd's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From Ningbo Orient Wires & CablesLtd's P/E?

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Ningbo Orient Wires & CablesLtd's 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.

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

If you're unsure about the strength of Ningbo Orient Wires & CablesLtd'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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