Despite an already strong run, Keli Sensing Technology (Ningbo) Co.,Ltd. (SHSE:603662) shares have been powering on, with a gain of 33% in the last thirty days. Looking further back, the 21% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

Following the firm bounce in price, Keli Sensing Technology (Ningbo)Ltd's price-to-earnings (or "P/E") ratio of 41x 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 36x and even P/E's below 21x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Keli Sensing Technology (Ningbo)Ltd has been doing quite well of late. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors' willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.

How Is Keli Sensing Technology (Ningbo)Ltd's Growth Trending?

There's an inherent assumption that a company should outperform the market for P/E ratios like Keli Sensing Technology (Ningbo)Ltd's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 18% gain to the company's bottom line. Still, incredibly EPS has fallen 5.0% in total from three years ago, which is quite disappointing. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Looking ahead now, EPS is anticipated to climb by 29% during the coming year according to the three analysts following the company. That's shaping up to be materially lower than the 40% growth forecast for the broader market.

In light of this, it's alarming that Keli Sensing Technology (Ningbo)Ltd'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 Key Takeaway

The large bounce in Keli Sensing Technology (Ningbo)Ltd's shares has lifted the company's P/E to a fairly high level. 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 Keli Sensing Technology (Ningbo)Ltd 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.

Before you settle on your opinion, we've discovered 2 warning signs for Keli Sensing Technology (Ningbo)Ltd 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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