Despite an already strong run, Ways Electron Co.,Ltd. (SHSE:605218) shares have been powering on, with a gain of 48% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 60% in the last year.

Since its price has surged higher, given close to half the companies in China have price-to-earnings ratios (or "P/E's") below 36x, you may consider Ways ElectronLtd as a stock to avoid entirely with its 78.5x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

It looks like earnings growth has deserted Ways ElectronLtd recently, which is not something to boast about. One possibility is that the P/E is high because investors think the benign earnings growth will improve 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.

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

The only time you'd be truly comfortable seeing a P/E as steep as Ways ElectronLtd's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered virtually the same number to the company's bottom line as the year before. Still, the latest three year period was better as it's delivered a decent 29% overall rise in EPS. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 41% shows it's noticeably less attractive on an annualised basis.

With this information, we find it concerning that Ways ElectronLtd 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 Key Takeaway

The strong share price surge has got Ways ElectronLtd's P/E rushing to great heights as well. 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 Ways ElectronLtd 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.

There are also other vital risk factors to consider and we've discovered 3 warning signs for Ways ElectronLtd (2 are significant!) that you should be aware of before investing here.

You might be able to find a better investment than Ways ElectronLtd. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.