Toread Holdings Group Co., Ltd. (SZSE:300005) shareholders have had their patience rewarded with a 30% share price jump in the last month. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 29% over that time.

Since its price has surged higher, given around half the companies in China have price-to-earnings ratios (or "P/E's") below 32x, you may consider Toread Holdings Group as a stock to potentially avoid with its 40.2x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Toread Holdings Group 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. If not, then existing shareholders might be a little nervous about the viability of the share price.

Is There Enough Growth For Toread Holdings Group?

There's an inherent assumption that a company should outperform the market for P/E ratios like Toread Holdings Group's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 57%. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 22% per annum as estimated by the two analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 26% each year, which is noticeably more attractive.

With this information, we find it concerning that Toread Holdings Group is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. 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

The large bounce in Toread Holdings Group's shares has lifted the company's P/E to a fairly high level. 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 Toread Holdings Group currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for Toread Holdings Group with six simple checks will allow you to discover any risks that could be an issue.

You might be able to find a better investment than Toread Holdings Group. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.