Hubei Century Network Technology Inc. (SZSE:300494) shares have continued their recent momentum with a 25% gain in the last month alone. The annual gain comes to 141% following the latest surge, making investors sit up and take notice.

After such a large jump in price, Hubei Century Network Technology's price-to-earnings (or "P/E") ratio of 44.2x 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.

The recently shrinking earnings for Hubei Century Network Technology have been in line with the market. One possibility is that the P/E is high because investors think the company can turn things around and break free from the broader downward trend in earnings. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Hubei Century Network Technology

Is There Enough Growth For Hubei Century Network Technology?

In order to justify its P/E ratio, Hubei Century Network Technology would need to produce impressive growth in excess of the market.

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 1.0%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 148% in total over the last three years. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Turning to the outlook, the next year should generate growth of 26% as estimated by the only analyst watching the company. With the market predicted to deliver 44% growth , the company is positioned for a weaker earnings result.

In light of this, it's alarming that Hubei Century Network Technology's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Final Word

Hubei Century Network Technology shares have received a push in the right direction, but its P/E is elevated too. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Hubei Century Network Technology currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Plus, you should also learn about this 1 warning sign we've spotted with Hubei Century Network Technology.

If you're unsure about the strength of Hubei Century Network Technology's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.