Wuxi Longsheng Technology Co.,Ltd (SZSE:300680) shareholders have had their patience rewarded with a 45% share price jump in the last month. Looking further back, the 21% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

Although its price has surged higher, you could still be forgiven for feeling indifferent about Wuxi Longsheng TechnologyLtd's P/E ratio of 32.4x, since the median price-to-earnings (or "P/E") ratio in China is also close to 32x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

Wuxi Longsheng TechnologyLtd certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

Does Growth Match The P/E?

In order to justify its P/E ratio, Wuxi Longsheng TechnologyLtd would need to produce growth that's similar to the market.

Retrospectively, the last year delivered an exceptional 69% gain to the company's bottom line. Pleasingly, EPS has also lifted 84% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 33% per annum as estimated by the four analysts watching the company. With the market only predicted to deliver 26% per annum, the company is positioned for a stronger earnings result.

In light of this, it's curious that Wuxi Longsheng TechnologyLtd's P/E sits in line with the majority of other companies. Apparently some shareholders are skeptical of the forecasts and have been accepting lower selling prices.

The Final Word

Its shares have lifted substantially and now Wuxi Longsheng TechnologyLtd's P/E is also back up to the market median. 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.

We've established that Wuxi Longsheng TechnologyLtd currently trades on a lower than expected P/E since its forecast growth is higher than the wider market. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing pressure on the P/E ratio. It appears some are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

Before you settle on your opinion, we've discovered 2 warning signs for Wuxi Longsheng TechnologyLtd that you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.