Minami Acoustics Limited (SZSE:301383) shares have continued their recent momentum with a 26% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 40%.

In spite of the firm bounce in price, you could still be forgiven for feeling indifferent about Minami Acoustics' P/E ratio of 39.5x, since the median price-to-earnings (or "P/E") ratio in China is also close to 38x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Minami Acoustics has been doing quite well of late. It might be that many expect the strong earnings performance to deteriorate like the rest, which has kept the P/E from rising. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

How Is Minami Acoustics' Growth Trending?

Minami Acoustics' P/E ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the market.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 4.2% last year. The solid recent performance means it was also able to grow EPS by 11% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Turning to the outlook, the next year should bring diminished returns, with earnings decreasing 10% as estimated by the lone analyst watching the company. With the market predicted to deliver 38% growth , that's a disappointing outcome.

In light of this, it's somewhat alarming that Minami Acoustics' P/E sits in line with the majority of other companies. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock right now. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the negative growth outlook.

What We Can Learn From Minami Acoustics' P/E?

Minami Acoustics appears to be back in favour with a solid price jump getting its P/E back in line with most other companies. 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.

We've established that Minami Acoustics currently trades on a higher than expected P/E for a company whose earnings are forecast to decline. When we see a poor outlook with earnings heading backwards, we suspect share price is at risk of declining, sending the moderate P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Minami Acoustics (of which 2 are a bit concerning!) you should know about.

Of course, you might also be able to find a better stock than Minami Acoustics. 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.