The Chengdu Zhimingda Electronics Co., Ltd. (SHSE:688636) share price has done very well over the last month, posting an excellent gain of 33%. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 27% in the last twelve months.

After such a large jump in price, given around half the companies in China have price-to-earnings ratios (or "P/E's") below 33x, you may consider Chengdu Zhimingda Electronics as a stock to potentially avoid with its 48.4x 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 as high as it is.

Chengdu Zhimingda Electronics has been struggling lately as its earnings have declined faster than most other companies. 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.

Does Growth Match The High P/E?

The only time you'd be truly comfortable seeing a P/E as high as Chengdu Zhimingda Electronics' is when the company's growth is on track to outshine the market.

Retrospectively, the last year delivered a frustrating 14% 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 61% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 53% per annum during the coming three years according to the dual analysts following the company. With the market only predicted to deliver 19% per annum, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Chengdu Zhimingda Electronics' P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Chengdu Zhimingda Electronics' P/E

Chengdu Zhimingda Electronics' P/E is getting right up there since its shares have risen strongly. 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 Chengdu Zhimingda Electronics' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

You should always think about risks. Case in point, we've spotted 2 warning signs for Chengdu Zhimingda Electronics you should be aware of, and 1 of them is a bit unpleasant.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.