Jiangsu Yangdian Science & Technology Co. Ltd. (SZSE:301012) shareholders would be excited to see that the share price has had a great month, posting a 29% gain and recovering from prior weakness. Taking a wider view, although not as strong as the last month, the full year gain of 14% is also fairly reasonable.

After such a large jump in price, Jiangsu Yangdian Science & Technology may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 68.1x, since almost half of all companies in China have P/E ratios under 29x and even P/E's lower than 18x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Recent times have been quite advantageous for Jiangsu Yangdian Science & Technology as its earnings have been rising very briskly. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors' willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Is There Enough Growth For Jiangsu Yangdian Science & Technology?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Jiangsu Yangdian Science & Technology's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 360%. Still, incredibly EPS has fallen 36% in total from three years ago, which is quite disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 36% shows it's an unpleasant look.

In light of this, it's alarming that Jiangsu Yangdian Science & Technology'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 Yangdian Science & Technology's P/E

The strong share price surge has got Jiangsu Yangdian Science & Technology's P/E rushing to great heights as well. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Jiangsu Yangdian Science & Technology currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. 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.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Jiangsu Yangdian Science & Technology (at least 2 which shouldn't be ignored), and understanding them should be part of your investment process.

If you're unsure about the strength of Jiangsu Yangdian Science & Technology'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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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.