China Marine Information Electronics Company Limited (SHSE:600764) shares have continued their recent momentum with a 26% gain in the last month alone. Unfortunately, despite the strong performance over the last month, the full year gain of 9.2% isn't as attractive.

Following the firm bounce in price, given close to half the companies in China have price-to-earnings ratios (or "P/E's") below 33x, you may consider China Marine Information Electronics as a stock to avoid entirely with its 60.8x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Recent times haven't been advantageous for China Marine Information Electronics as its earnings have been falling quicker than most other companies. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. 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 far outperform the market for P/E ratios like China Marine Information Electronics' to be considered reasonable.

Retrospectively, the last year delivered a frustrating 45% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 63% in aggregate. 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% per annum during the coming three years according to the dual analysts following the company. With the market only predicted to deliver 19% each year, the company is positioned for a stronger earnings result.

With this information, we can see why China Marine Information Electronics is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What We Can Learn From China Marine Information Electronics' P/E?

Shares in China Marine Information Electronics have built up some good momentum lately, which has really inflated its P/E. 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.

As we suspected, our examination of China Marine Information Electronics' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. 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.

You should always think about risks. Case in point, we've spotted 2 warning signs for China Marine Information Electronics 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.