Despite an already strong run, Cre8 Direct (NingBo) Co., Ltd. (SZSE:300703) shares have been powering on, with a gain of 44% in the last thirty days. Looking further back, the 17% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

Even after such a large jump in price, it's still not a stretch to say that Cre8 Direct (NingBo)'s price-to-earnings (or "P/E") ratio of 34.1x right now seems quite "middle-of-the-road" compared to the market in China, where the median P/E ratio is around 35x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

With earnings growth that's exceedingly strong of late, Cre8 Direct (NingBo) has been doing very well. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If that doesn't eventuate, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

What Are Growth Metrics Telling Us About The P/E?

The only time you'd be comfortable seeing a P/E like Cre8 Direct (NingBo)'s is when the company's growth is tracking the market closely.

Retrospectively, the last year delivered an exceptional 34% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 192% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 39% shows it's about the same on an annualised basis.

With this information, we can see why Cre8 Direct (NingBo) is trading at a fairly similar P/E to the market. Apparently shareholders are comfortable to simply hold on assuming the company will continue keeping a low profile.

The Key Takeaway

Cre8 Direct (NingBo)'s stock has a lot of momentum behind it lately, which has brought its P/E level with the market. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Cre8 Direct (NingBo) maintains its moderate P/E off the back of its recent three-year growth being in line with the wider market forecast, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings won't throw up any surprises. If recent medium-term earnings trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Cre8 Direct (NingBo) (at least 1 which is a bit concerning), and understanding these should be part of your investment process.

Of course, you might also be able to find a better stock than Cre8 Direct (NingBo). 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.