Chow Tai Fook Jewellery Group Limited (HKG:1929) shares have had a really impressive month, gaining 35% after a shaky period beforehand. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 28% in the last twelve months.

Since its price has surged higher, given around half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") below 10x, you may consider Chow Tai Fook Jewellery Group as a stock to potentially avoid with its 12.7x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Recent times have been advantageous for Chow Tai Fook Jewellery Group as its earnings have been rising faster than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

How Is Chow Tai Fook Jewellery Group's Growth Trending?

There's an inherent assumption that a company should outperform the market for P/E ratios like Chow Tai Fook Jewellery Group's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 21% gain to the company's bottom line. The latest three year period has also seen a 8.0% overall rise in EPS, aided extensively by its short-term performance. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 9.5% each year over the next three years. That's shaping up to be materially lower than the 12% each year growth forecast for the broader market.

With this information, we find it concerning that Chow Tai Fook Jewellery Group is trading at a P/E higher than the market. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

What We Can Learn From Chow Tai Fook Jewellery Group's P/E?

Chow Tai Fook Jewellery Group's 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.

Our examination of Chow Tai Fook Jewellery Group's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

You always need to take note of risks, for example - Chow Tai Fook Jewellery Group has 2 warning signs we think you should be aware of.

Of course, you might also be able to find a better stock than Chow Tai Fook Jewellery Group. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.