Betta Pharmaceuticals Co., Ltd. (SZSE:300558) shares have continued their recent momentum with a 34% gain in the last month alone. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 20% over that time.

Following the firm bounce in price, Betta Pharmaceuticals' price-to-earnings (or "P/E") ratio of 45.4x might make it look like a sell right now compared to the market in China, where around half of the companies have P/E ratios below 33x and even P/E's below 20x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

Recent times have been pleasing for Betta Pharmaceuticals as its earnings have risen in spite of the market's earnings going into reverse. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. If not, then existing shareholders might be a little nervous about the viability of the share price.

How Is Betta Pharmaceuticals' Growth Trending?

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

If we review the last year of earnings growth, the company posted a terrific increase of 111%. Still, incredibly EPS has fallen 39% in total from three years ago, which is quite disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the six analysts covering the company suggest earnings should grow by 26% each year over the next three years. Meanwhile, the rest of the market is forecast to only expand by 19% each year, which is noticeably less attractive.

With this information, we can see why Betta Pharmaceuticals is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Betta Pharmaceuticals' P/E

Betta Pharmaceuticals shares have received a push in the right direction, but its P/E is elevated too. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Betta Pharmaceuticals maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Betta Pharmaceuticals you should know about.

If you're unsure about the strength of Betta Pharmaceuticals' 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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