NanJing Research Institute of Surveying, Mapping & Geotechnical Investigation, Co.Ltd (SZSE:300826) shareholders are no doubt pleased to see that the share price has bounced 31% in the last month, although it is still struggling to make up recently lost ground. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 3.4% over the last year.

After such a large jump in price, NanJing Research Institute of Surveying Mapping & Geotechnical InvestigationLtd's price-to-earnings (or "P/E") ratio of 34.8x 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 31x and even P/E's below 19x 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.

For instance, NanJing Research Institute of Surveying Mapping & Geotechnical InvestigationLtd's receding earnings in recent times would have to be some food for thought. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.

Is There Enough Growth For NanJing Research Institute of Surveying Mapping & Geotechnical InvestigationLtd?

NanJing Research Institute of Surveying Mapping & Geotechnical InvestigationLtd's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 13%. As a result, earnings from three years ago have also fallen 40% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

In contrast to the company, the rest of the market is expected to grow by 41% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

In light of this, it's alarming that NanJing Research Institute of Surveying Mapping & Geotechnical InvestigationLtd's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

The Bottom Line On NanJing Research Institute of Surveying Mapping & Geotechnical InvestigationLtd's P/E

NanJing Research Institute of Surveying Mapping & Geotechnical InvestigationLtd 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 NanJing Research Institute of Surveying Mapping & Geotechnical InvestigationLtd currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Before you take the next step, you should know about the 4 warning signs for NanJing Research Institute of Surveying Mapping & Geotechnical InvestigationLtd (1 is a bit unpleasant!) that we have uncovered.

If you're unsure about the strength of NanJing Research Institute of Surveying Mapping & Geotechnical InvestigationLtd'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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