Precious Dragon Technology Holdings Limited (HKG:1861) shares have continued their recent momentum with a 52% gain in the last month alone. The annual gain comes to 117% following the latest surge, making investors sit up and take notice.

Since its price has surged higher, Precious Dragon Technology Holdings' price-to-earnings (or "P/E") ratio of 13x might make it look like a sell right now compared to the market in Hong Kong, where around half of the companies have P/E ratios below 9x and even P/E's below 5x 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.

As an illustration, earnings have deteriorated at Precious Dragon Technology Holdings over the last year, which is not ideal at all. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

How Is Precious Dragon Technology Holdings' Growth Trending?

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

Retrospectively, the last year delivered a frustrating 2.5% decrease to the company's bottom line. Still, the latest three year period has seen an excellent 78% overall rise in EPS, in spite of its unsatisfying short-term performance. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

It's interesting to note that the rest of the market is similarly expected to grow by 23% over the next year, which is fairly even with the company's recent medium-term annualised growth rates.

With this information, we find it interesting that Precious Dragon Technology Holdings is trading at a high P/E compared to the market. Apparently many investors in the company are more bullish than recent times would indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as a continuation of recent earnings trends would weigh down the share price eventually.

The Bottom Line On Precious Dragon Technology Holdings' P/E

Precious Dragon Technology Holdings' P/E is getting right up there since its shares have risen strongly. 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.

Our examination of Precious Dragon Technology Holdings revealed its three-year earnings trends aren't impacting its high P/E as much as we would have predicted, given they look similar to current market expectations. Right now we are uncomfortable with the high P/E as this earnings performance isn't likely to support such positive sentiment for long. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.

It is also worth noting that we have found 2 warning signs for Precious Dragon Technology Holdings (1 is significant!) that you need to take into consideration.

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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