Petpal Pet Nutrition Technology Co., Ltd. (SZSE:300673) shares have had a really impressive month, gaining 26% after a shaky period beforehand. Unfortunately, despite the strong performance over the last month, the full year gain of 3.5% isn't as attractive.

Since its price has surged higher, given close to half the companies in China have price-to-earnings ratios (or "P/E's") below 31x, you may consider Petpal Pet Nutrition Technology as a stock to avoid entirely with its 50.6x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Petpal Pet Nutrition Technology's earnings growth of late has been pretty similar to most other companies. One possibility is that the P/E is high because investors think this modest earnings performance will accelerate. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

Petpal Pet Nutrition Technology's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

Retrospectively, the last year delivered virtually the same number to the company's bottom line as the year before. The lack of growth did nothing to help the company's aggregate three-year performance, which is an unsavory 42% drop in EPS. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Turning to the outlook, the next three years should generate growth of 51% per year as estimated by the eleven analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 21% per annum, which is noticeably less attractive.

With this information, we can see why Petpal Pet Nutrition Technology is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Key Takeaway

The strong share price surge has got Petpal Pet Nutrition Technology's P/E rushing to great heights as well. 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 Petpal Pet Nutrition Technology maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

The company's balance sheet is another key area for risk analysis. Our free balance sheet analysis for Petpal Pet Nutrition Technology with six simple checks will allow you to discover any risks that could be an issue.

You might be able to find a better investment than Petpal Pet Nutrition Technology. 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.