Rimbaco Group Global Limited (HKG:1953) shareholders would be excited to see that the share price has had a great month, posting a 36% gain and recovering from prior weakness. The last 30 days bring the annual gain to a very sharp 56%.

Since its price has surged higher, Rimbaco Group Global's price-to-earnings (or "P/E") ratio of 12.7x might make it look like a sell right now compared to the market in Hong Kong, where around half of the companies have P/E ratios below 8x and even P/E's below 5x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's lofty.

Recent times have been quite advantageous for Rimbaco Group Global as its earnings have been rising very briskly. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for Rimbaco Group Global

How Is Rimbaco Group Global's Growth Trending?

In order to justify its P/E ratio, Rimbaco Group Global 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 81%. However, this wasn't enough as the latest three year period has seen a very unpleasant 45% drop in EPS in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Comparing that to the market, which is predicted to deliver 17% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

With this information, we find it concerning that Rimbaco Group Global is trading at a P/E higher than the market. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

What We Can Learn From Rimbaco Group Global's P/E?

The large bounce in Rimbaco Group Global's shares has lifted the company's P/E to a fairly high level. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of Rimbaco Group Global revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

It is also worth noting that we have found 3 warning signs for Rimbaco Group Global (1 is potentially serious!) that you need to take into consideration.

You might be able to find a better investment than Rimbaco Group Global. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (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.