VT Industrial Technology Co.,Ltd (SZSE:300707) shareholders would be excited to see that the share price has had a great month, posting a 42% gain and recovering from prior weakness. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 2.4% in the last twelve months.

Following the firm bounce in price, VT Industrial TechnologyLtd's price-to-earnings (or "P/E") ratio of 69.6x might make it look like a strong 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. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

As an illustration, earnings have deteriorated at VT Industrial TechnologyLtd over the last year, which is not ideal at all. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

How Is VT Industrial TechnologyLtd's Growth Trending?

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

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 20%. That put a dampener on the good run it was having over the longer-term as its three-year EPS growth is still a noteworthy 20% in total. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been mostly respectable for the company.

This is in contrast to the rest of the market, which is expected to grow by 37% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it concerning that VT Industrial TechnologyLtd is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. 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 Final Word

Shares in VT Industrial TechnologyLtd have built up some good momentum lately, which has really inflated its P/E. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of VT Industrial TechnologyLtd revealed its three-year earnings trends aren't impacting its high P/E anywhere near as much as we would have predicted, given they look worse than current market expectations. 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. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Having said that, be aware VT Industrial TechnologyLtd is showing 2 warning signs in our investment analysis, you should know about.

Of course, you might also be able to find a better stock than VT Industrial TechnologyLtd. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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