The Jiangsu Tongguang Electronic Wire & Cable Co., Ltd. (SZSE:300265) share price has done very well over the last month, posting an excellent gain of 25%. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 18% over that time.

Following the firm bounce in price, Jiangsu Tongguang Electronic Wire & Cable may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 47.9x, since almost half of all companies in China have P/E ratios under 31x and even P/E's lower than 19x are not unusual. 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.

For instance, Jiangsu Tongguang Electronic Wire & Cable's receding earnings in recent times would have to be some food for thought. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.

Does Growth Match The High P/E?

In order to justify its P/E ratio, Jiangsu Tongguang Electronic Wire & Cable would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered a frustrating 26% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 13% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Comparing that to the market, which is predicted to deliver 38% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

In light of this, it's alarming that Jiangsu Tongguang Electronic Wire & Cable'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 Jiangsu Tongguang Electronic Wire & Cable's P/E

The strong share price surge has got Jiangsu Tongguang Electronic Wire & Cable'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.

Our examination of Jiangsu Tongguang Electronic Wire & Cable revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. 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.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Jiangsu Tongguang Electronic Wire & Cable that you should be aware of.

If you're unsure about the strength of Jiangsu Tongguang Electronic Wire & Cable'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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