Despite an already strong run, Shenzhen United Winners Laser Co., Ltd. (SHSE:688518) shares have been powering on, with a gain of 27% in the last thirty days. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 8.0% in the last twelve months.

After such a large jump in price, Shenzhen United Winners Laser's price-to-earnings (or "P/E") ratio of 51.7x might make it look like a sell right now compared to the market in China, where around half of the companies have P/E ratios below 34x and even P/E's below 20x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Recent times haven't been advantageous for Shenzhen United Winners Laser as its earnings have been falling quicker than most other companies. It might be that many expect the dismal earnings performance to recover substantially, 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.

Does Growth Match The High P/E?

Shenzhen United Winners Laser's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

Retrospectively, the last year delivered a frustrating 63% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 2.2% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next year should generate growth of 186% as estimated by the eight analysts watching the company. With the market only predicted to deliver 39%, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Shenzhen United Winners Laser's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What We Can Learn From Shenzhen United Winners Laser's P/E?

The large bounce in Shenzhen United Winners Laser's shares has lifted the company's P/E to a fairly high level. 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 Shenzhen United Winners Laser maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

You need to take note of risks, for example - Shenzhen United Winners Laser has 4 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

You might be able to find a better investment than Shenzhen United Winners Laser. 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.