Those holding Jiangsu Nata Opto-electronic Material Co., Ltd. (SZSE:300346) shares would be relieved that the share price has rebounded 26% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 19% over that time.

Following the firm bounce in price, given close to half the companies in China have price-to-earnings ratios (or "P/E's") below 29x, you may consider Jiangsu Nata Opto-electronic Material as a stock to avoid entirely with its 73.5x 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.

With earnings that are retreating more than the market's of late, Jiangsu Nata Opto-electronic Material has been very sluggish. It might be that many expect the dismal earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be very nervous about the viability of the share price.

How Is Jiangsu Nata Opto-electronic Material's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as steep as Jiangsu Nata Opto-electronic Material's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered a frustrating 16% decrease to the company's bottom line. However, a few very strong years before that means that it was still able to grow EPS by an impressive 79% in total over the last three years. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Turning to the outlook, the next year should generate growth of 61% as estimated by the three analysts watching the company. With the market only predicted to deliver 41%, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Jiangsu Nata Opto-electronic Material's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From Jiangsu Nata Opto-electronic Material's P/E?

Jiangsu Nata Opto-electronic Material's P/E is flying high just like its stock has during the last month. 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.

We've established that Jiangsu Nata Opto-electronic Material maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

Having said that, be aware Jiangsu Nata Opto-electronic Material is showing 1 warning sign in our investment analysis, you should know about.

If these risks are making you reconsider your opinion on Jiangsu Nata Opto-electronic Material, explore our interactive list of high quality stocks to get an idea of what else is out there.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.