Zhejiang Meorient Commerce Exhibition Inc. (SZSE:300795) shares have continued their recent momentum with a 47% gain in the last month alone. While recent buyers may be laughing, long-term holders might not be as pleased since the recent gain only brings the stock back to where it started a year ago.

In spite of the firm bounce in price, it's still not a stretch to say that Zhejiang Meorient Commerce Exhibition's price-to-earnings (or "P/E") ratio of 34.8x right now seems quite "middle-of-the-road" compared to the market in China, where the median P/E ratio is around 37x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

Zhejiang Meorient Commerce Exhibition certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. One possibility is that the P/E is moderate because investors think the company's earnings will be less resilient moving forward. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

Does Growth Match The P/E?

In order to justify its P/E ratio, Zhejiang Meorient Commerce Exhibition would need to produce growth that's similar to the market.

If we review the last year of earnings growth, the company posted a terrific increase of 23%. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Shifting to the future, estimates from the five analysts covering the company suggest earnings should grow by 62% over the next year. With the market only predicted to deliver 38%, the company is positioned for a stronger earnings result.

With this information, we find it interesting that Zhejiang Meorient Commerce Exhibition is trading at a fairly similar P/E to the market. It may be that most investors aren't convinced the company can achieve future growth expectations.

The Key Takeaway

Its shares have lifted substantially and now Zhejiang Meorient Commerce Exhibition's P/E is also back up to the market median. 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 Zhejiang Meorient Commerce Exhibition currently trades on a lower than expected P/E since its forecast growth is higher than the wider market. There could be some unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

There are also other vital risk factors to consider and we've discovered 2 warning signs for Zhejiang Meorient Commerce Exhibition (1 can't be ignored!) that you should be aware of before investing here.

If you're unsure about the strength of Zhejiang Meorient Commerce Exhibition's 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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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.