Jiangsu Jinling Sports Equipment Co.,Ltd. (SZSE:300651) shares have continued their recent momentum with a 28% gain in the last month alone. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 11% in the last twelve months.

Since its price has surged higher, Jiangsu Jinling Sports EquipmentLtd may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 43.8x, since almost half of all companies in China have P/E ratios under 36x and even P/E's lower than 21x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

For instance, Jiangsu Jinling Sports EquipmentLtd's receding earnings in recent times would have to be some food for thought. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

What Are Growth Metrics Telling Us About The High P/E?

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

Retrospectively, the last year delivered a frustrating 2.1% decrease to the company's bottom line. Still, the latest three year period has seen an excellent 121% overall rise in EPS, in spite of its unsatisfying short-term performance. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 38% shows it's noticeably less attractive on an annualised basis.

With this information, we find it concerning that Jiangsu Jinling Sports EquipmentLtd is trading at a P/E higher than the market. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Bottom Line On Jiangsu Jinling Sports EquipmentLtd's P/E

The large bounce in Jiangsu Jinling Sports EquipmentLtd's shares has lifted the company's P/E to a fairly high level. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Jiangsu Jinling Sports EquipmentLtd currently trades on a much higher than expected P/E since its recent three-year growth is lower than the wider market forecast. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Plus, you should also learn about this 1 warning sign we've spotted with Jiangsu Jinling Sports EquipmentLtd.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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