Changzheng Engineering Technology Co.,Ltd (SHSE:603698) shares have continued their recent momentum with a 31% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 33%.

Following the firm bounce in price, given around half the companies in China have price-to-earnings ratios (or "P/E's") below 35x, you may consider Changzheng Engineering TechnologyLtd as a stock to potentially avoid with its 49.3x 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.

Changzheng Engineering TechnologyLtd 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. It seems that many are expecting the company to continue defying the broader market adversity, 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.

Does Growth Match The High P/E?

In order to justify its P/E ratio, Changzheng Engineering TechnologyLtd would need to produce impressive growth in excess of the market.

If we review the last year of earnings growth, the company posted a terrific increase of 25%. As a result, it also grew EPS by 6.2% in total over the last three years. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Turning to the outlook, the next year should generate growth of 44% as estimated by the only analyst watching the company. With the market predicted to deliver 40% growth , the company is positioned for a comparable earnings result.

With this information, we find it interesting that Changzheng Engineering TechnologyLtd is trading at a high P/E compared to the market. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

The Bottom Line On Changzheng Engineering TechnologyLtd's P/E

The large bounce in Changzheng Engineering TechnologyLtd's shares has lifted the company's P/E to a fairly high level. 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 Changzheng Engineering TechnologyLtd currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

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

If you're unsure about the strength of Changzheng Engineering TechnologyLtd'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.