Nanjing Public Utilities Development Co., Ltd. (SZSE:000421) shareholders have had their patience rewarded with a 81% share price jump in the last month. Looking back a bit further, it's encouraging to see the stock is up 85% in the last year.

Following the firm bounce in price, given close to half the companies in China have price-to-earnings ratios (or "P/E's") below 34x, you may consider Nanjing Public Utilities Development as a stock to avoid entirely with its 52.5x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's exceedingly strong of late, Nanjing Public Utilities Development has been doing very well. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Nanjing Public Utilities Development

How Is Nanjing Public Utilities Development's Growth Trending?

Nanjing Public Utilities Development'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 an exceptional 36% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen a very unpleasant 75% drop in EPS in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

In contrast to the company, the rest of the market is expected to grow by 44% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

In light of this, it's alarming that Nanjing Public Utilities Development's P/E sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

The Final Word

The strong share price surge has got Nanjing Public Utilities Development's P/E rushing to great heights as well. 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.

Our examination of Nanjing Public Utilities Development revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Before you settle on your opinion, we've discovered 3 warning signs for Nanjing Public Utilities Development (1 is a bit concerning!) that you should be aware of.

If you're unsure about the strength of Nanjing Public Utilities Development'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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