Despite an already strong run, Dongfeng Electronic Technology Co.,Ltd. (SHSE:600081) shares have been powering on, with a gain of 31% in the last thirty days. Notwithstanding the latest gain, the annual share price return of 5.9% isn't as impressive.

Following the firm bounce in price, Dongfeng Electronic TechnologyLtd may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 53.4x, since almost half of all companies in China have P/E ratios under 37x 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.

Dongfeng Electronic TechnologyLtd has been doing a good job lately as it's been growing earnings at a solid pace. One possibility is that the P/E is high because investors think this respectable earnings growth will be 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.

Is There Enough Growth For Dongfeng Electronic TechnologyLtd?

The only time you'd be truly comfortable seeing a P/E as high as Dongfeng Electronic TechnologyLtd's is when the company's growth is on track to outshine the market.

If we review the last year of earnings growth, the company posted a worthy increase of 15%. However, this wasn't enough as the latest three year period has seen an unpleasant 41% overall drop in EPS. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Comparing that to the market, which is predicted to deliver 40% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

In light of this, it's alarming that Dongfeng Electronic TechnologyLtd's P/E sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate 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.

What We Can Learn From Dongfeng Electronic TechnologyLtd's P/E?

Dongfeng Electronic TechnologyLtd shares have received a push in the right direction, but its P/E is elevated too. 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.

We've established that Dongfeng Electronic TechnologyLtd currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. When we see earnings heading backwards and underperforming the market forecasts, 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.

You need to take note of risks, for example - Dongfeng Electronic TechnologyLtd has 3 warning signs (and 1 which shouldn't be ignored) we think you should know about.

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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