Wuxi NCE Power Co.,Ltd. (SHSE:605111) shares have had a really impressive month, gaining 31% after a shaky period beforehand. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 30% in the last twelve months.

After such a large jump in price, Wuxi NCE PowerLtd may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 38.3x, since almost half of all companies in China have P/E ratios under 31x and even P/E's lower than 18x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Wuxi NCE PowerLtd hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

Is There Enough Growth For Wuxi NCE PowerLtd?

Wuxi NCE PowerLtd's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

Retrospectively, the last year delivered a frustrating 33% decrease to the company's bottom line. Even so, admirably EPS has lifted 61% in aggregate from three years ago, notwithstanding the last 12 months. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Turning to the outlook, the next year should generate growth of 23% as estimated by the six analysts watching the company. With the market predicted to deliver 40% growth , the company is positioned for a weaker earnings result.

In light of this, it's alarming that Wuxi NCE PowerLtd's P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. 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 growth outlook.

The Final Word

Wuxi NCE PowerLtd's P/E is getting right up there since its shares have risen strongly. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Wuxi NCE PowerLtd currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

You always need to take note of risks, for example - Wuxi NCE PowerLtd has 2 warning signs we think you should be aware of.

If you're unsure about the strength of Wuxi NCE PowerLtd'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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