NBTM New Materials Group Co., Ltd. (SHSE:600114) shareholders are no doubt pleased to see that the share price has bounced 30% in the last month, although it is still struggling to make up recently lost ground. Looking back a bit further, it's encouraging to see the stock is up 35% in the last year.

Following the firm bounce in price, given close to half the companies in China have price-to-earnings ratios (or "P/E's") below 28x, you may consider NBTM New Materials Group as a stock to avoid entirely with its 51.8x 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.

NBTM New Materials Group 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?

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

Retrospectively, the last year delivered an exceptional 421% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen a very unpleasant 39% drop in EPS in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next year should generate growth of 60% as estimated by the five analysts watching the company. That's shaping up to be materially higher than the 41% growth forecast for the broader market.

With this information, we can see why NBTM New Materials Group is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What We Can Learn From NBTM New Materials Group's P/E?

Shares in NBTM New Materials Group have built up some good momentum lately, which has really inflated its P/E. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

As we suspected, our examination of NBTM New Materials Group's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. 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.

Before you take the next step, you should know about the 2 warning signs for NBTM New Materials Group (1 is a bit concerning!) that we have uncovered.

If you're unsure about the strength of NBTM New Materials Group'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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