The Sinotruk (Hong Kong) Limited (HKG:3808) share price has done very well over the last month, posting an excellent gain of 29%. Looking back a bit further, it's encouraging to see the stock is up 65% in the last year.

Since its price has surged higher, Sinotruk (Hong Kong) may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 16.2x, since almost half of all companies in Hong Kong have P/E ratios under 8x and even P/E's lower than 4x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Sinotruk (Hong Kong) certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. 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?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Sinotruk (Hong Kong)'s to be considered reasonable.

Retrospectively, the last year delivered an exceptional 46% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen a very unpleasant 26% drop in EPS in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the eleven analysts covering the company suggest earnings should grow by 30% per annum over the next three years. With the market only predicted to deliver 16% each year, the company is positioned for a stronger earnings result.

With this information, we can see why Sinotruk (Hong Kong) is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Sinotruk (Hong Kong)'s P/E

Sinotruk (Hong Kong)'s P/E is flying high just like its stock has during the last month. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Sinotruk (Hong Kong) 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.

The company's balance sheet is another key area for risk analysis. Our free balance sheet analysis for Sinotruk (Hong Kong) with six simple checks will allow you to discover any risks that could be an issue.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.