When close to half the companies in China have price-to-earnings ratios (or "P/E's") below 31x, you may consider Jiangxi Lian Chuang Optoelectronic Science And Technology Co.,lTd. (SHSE:600363) as a stock to potentially avoid with its 40.4x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd certainly has been doing a good job lately as it's been growing earnings more than most other companies. 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.

What Are Growth Metrics Telling Us About The High P/E?

In order to justify its P/E ratio, Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd would need to produce impressive growth in excess of the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 15% last year. EPS has also lifted 10% in aggregate from three years ago, mostly thanks to the last 12 months of growth. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Shifting to the future, estimates from the three analysts covering the company suggest earnings should grow by 87% over the next year. With the market only predicted to deliver 38%, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd'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 Bottom Line On Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd's 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 Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd 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. Unless these conditions change, they will continue to provide strong support to the share price.

The company's balance sheet is another key area for risk analysis. Our free balance sheet analysis for Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd with six simple checks will allow you to discover any risks that could be an issue.

Of course, you might also be able to find a better stock than Jiangxi Lian Chuang Optoelectronic Science And TechnologylTd. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.