Despite an already strong run, Hebei Sinopack Electronic Technology Co.,Ltd. (SZSE:003031) shares have been powering on, with a gain of 26% in the last thirty days. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 12% in the last twelve months.

After such a large jump in price, Hebei Sinopack Electronic TechnologyLtd may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 51.5x, since almost half of all companies in China have P/E ratios under 36x and even P/E's lower than 21x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

With earnings that are retreating more than the market's of late, Hebei Sinopack Electronic TechnologyLtd has been very sluggish. 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?

There's an inherent assumption that a company should outperform the market for P/E ratios like Hebei Sinopack Electronic TechnologyLtd's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 8.6% decrease to the company's bottom line. However, a few very strong years before that means that it was still able to grow EPS by an impressive 231% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Turning to the outlook, the next year should generate growth of 12% as estimated by the dual analysts watching the company. That's shaping up to be materially lower than the 40% growth forecast for the broader market.

With this information, we find it concerning that Hebei Sinopack Electronic TechnologyLtd 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. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

The Final Word

The large bounce in Hebei Sinopack Electronic TechnologyLtd's shares has lifted the company's P/E to a fairly high level. 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 Hebei Sinopack Electronic TechnologyLtd'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. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Hebei Sinopack Electronic TechnologyLtd you should know about.

If these risks are making you reconsider your opinion on Hebei Sinopack Electronic TechnologyLtd, explore our interactive list of high quality stocks to get an idea of what else is out there.

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