Changchun UP Optotech Co.,Ltd. (SZSE:002338) shareholders are no doubt pleased to see that the share price has bounced 30% in the last month, although it is still struggling to make up recently lost ground. Looking further back, the 16% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

Since its price has surged higher, Changchun UP OptotechLtd may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 77.1x, 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. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Changchun UP OptotechLtd has been doing quite well of late. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. If not, then existing shareholders might be a little nervous about the viability of the share price.

Does Growth Match The High P/E?

Changchun UP OptotechLtd's 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.

Retrospectively, the last year delivered a decent 15% gain to the company's bottom line. Pleasingly, EPS has also lifted 96% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 99% during the coming year according to the two analysts following the company. That's shaping up to be materially higher than the 41% growth forecast for the broader market.

In light of this, it's understandable that Changchun UP OptotechLtd'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.

What We Can Learn From Changchun UP OptotechLtd's P/E?

Shares in Changchun UP OptotechLtd have built up some good momentum lately, which has really inflated its P/E. 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.

We've established that Changchun UP OptotechLtd 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. 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. You can assess many of the main risks through our free balance sheet analysis for Changchun UP OptotechLtd with six simple checks.

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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