Ningbo KBE Electrical Technology Co.,Ltd. (SZSE:300863) shares have had a really impressive month, gaining 30% after a shaky period beforehand. Looking back a bit further, it's encouraging to see the stock is up 56% in the last year.

After such a large jump in price, Ningbo KBE Electrical TechnologyLtd may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 40x, since almost half of all companies in China have P/E ratios under 35x and even P/E's lower than 20x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

There hasn't been much to differentiate Ningbo KBE Electrical TechnologyLtd's and the market's retreating earnings lately. One possibility is that the P/E is high because investors think the company can turn things around and break free from the broader downward trend in earnings. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

How Is Ningbo KBE Electrical TechnologyLtd's Growth Trending?

Ningbo KBE Electrical TechnologyLtd's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

Retrospectively, the last year delivered virtually the same number to the company's bottom line as the year before. However, a few strong years before that means that it was still able to grow EPS by an impressive 70% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 31% during the coming year according to the sole analyst following the company. With the market predicted to deliver 38% growth , the company is positioned for a weaker earnings result.

With this information, we find it concerning that Ningbo KBE Electrical TechnologyLtd is trading at a P/E higher than the market. 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.

The Bottom Line On Ningbo KBE Electrical TechnologyLtd's P/E

The large bounce in Ningbo KBE Electrical TechnologyLtd's shares has lifted the company's P/E to a fairly high level. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Ningbo KBE Electrical 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. 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.

There are also other vital risk factors to consider and we've discovered 2 warning signs for Ningbo KBE Electrical TechnologyLtd (1 is a bit unpleasant!) that you should be aware of before investing here.

You might be able to find a better investment than Ningbo KBE Electrical TechnologyLtd. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.