Ningbo Runhe High-Tech Materials Co., Ltd. (SZSE:300727) shareholders would be excited to see that the share price has had a great month, posting a 37% gain and recovering from prior weakness. Looking further back, the 14% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

Since its price has surged higher, given around half the companies in China have price-to-earnings ratios (or "P/E's") below 33x, you may consider Ningbo Runhe High-Tech Materials as a stock to potentially avoid with its 42.5x 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.

Ningbo Runhe High-Tech Materials certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. If not, then existing shareholders might be a little nervous about the viability of the share price.

Does Growth Match The High P/E?

There's an inherent assumption that a company should outperform the market for P/E ratios like Ningbo Runhe High-Tech Materials' to be considered reasonable.

If we review the last year of earnings growth, the company posted a worthy increase of 6.2%. EPS has also lifted 17% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 31% during the coming year according to the dual analysts following the company. With the market predicted to deliver 37% growth , the company is positioned for a weaker earnings result.

In light of this, it's alarming that Ningbo Runhe High-Tech Materials' P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. 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 Ningbo Runhe High-Tech Materials' P/E?

Ningbo Runhe High-Tech Materials shares have received a push in the right direction, but its P/E is elevated too. 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 Ningbo Runhe High-Tech Materials currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. 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.

Having said that, be aware Ningbo Runhe High-Tech Materials is showing 2 warning signs in our investment analysis, you should know about.

Of course, you might also be able to find a better stock than Ningbo Runhe High-Tech Materials. 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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