Hubei W-olf Photoelectric Technology Co., Ltd. (SZSE:002962) shares have continued their recent momentum with a 38% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 54% in the last year.

After such a large jump in price, Hubei W-olf Photoelectric Technology's price-to-earnings (or "P/E") ratio of 74x might make it look like a strong sell right now compared to the market in China, where around half of the companies have P/E ratios below 32x and even P/E's below 20x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

For instance, Hubei W-olf Photoelectric Technology's receding earnings in recent times would have to be some food for thought. One possibility is that the P/E is high because investors think the company will still do 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.

How Is Hubei W-olf Photoelectric Technology's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as steep as Hubei W-olf Photoelectric Technology's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered a frustrating 9.7% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 52% overall. 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 38% 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 Hubei W-olf Photoelectric Technology'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 Key Takeaway

The strong share price surge has got Hubei W-olf Photoelectric Technology's P/E rushing to great heights as well. 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 Hubei W-olf Photoelectric Technology currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. 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. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

It is also worth noting that we have found 4 warning signs for Hubei W-olf Photoelectric Technology (1 shouldn't be ignored!) that you need to take into consideration.

Of course, you might also be able to find a better stock than Hubei W-olf Photoelectric Technology. 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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