Inspur Electronic Information Industry Co., Ltd. (SZSE:000977) shareholders would be excited to see that the share price has had a great month, posting a 47% gain and recovering from prior weakness. Notwithstanding the latest gain, the annual share price return of 5.9% isn't as impressive.

Following the firm bounce in price, given close to half the companies in China have price-to-earnings ratios (or "P/E's") below 29x, you may consider Inspur Electronic Information Industry as a stock to avoid entirely with its 45.8x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

With earnings that are retreating more than the market's of late, Inspur Electronic Information Industry has been very sluggish. 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.

How Is Inspur Electronic Information Industry's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as steep as Inspur Electronic Information Industry's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered a frustrating 45% decrease to the company's bottom line. Regardless, EPS has managed to lift by a handy 18% in aggregate from three years ago, thanks to the earlier period of growth. So we can start by confirming that the company has generally done a good job of growing earnings over that time, even though it had some hiccups along the way.

Looking ahead now, EPS is anticipated to climb by 80% during the coming year according to the analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 41%, which is noticeably less attractive.

With this information, we can see why Inspur Electronic Information Industry 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.

The Bottom Line On Inspur Electronic Information Industry's P/E

The strong share price surge has got Inspur Electronic Information Industry's P/E rushing to great heights as well. 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.

As we suspected, our examination of Inspur Electronic Information Industry'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. Unless these conditions change, they will continue to provide strong support to the share price.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Inspur Electronic Information Industry (of which 1 is a bit unpleasant!) you should know about.

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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