Techtronic Industries Company Limited (HKG:669) shareholders would be excited to see that the share price has had a great month, posting a 26% gain and recovering from prior weakness. The last 30 days bring the annual gain to a very sharp 28%.

Following the firm bounce in price, given close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") below 8x, you may consider Techtronic Industries as a stock to avoid entirely with its 25.9x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

Techtronic Industries could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.

How Is Techtronic Industries' Growth Trending?

The only time you'd be truly comfortable seeing a P/E as steep as Techtronic Industries' is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered a frustrating 9.4% decrease to the company's bottom line. Regardless, EPS has managed to lift by a handy 22% in aggregate from three years ago, thanks to the earlier period of growth. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been mostly respectable for the company.

Looking ahead now, EPS is anticipated to climb by 17% per annum during the coming three years according to the analysts following the company. That's shaping up to be similar to the 16% each year growth forecast for the broader market.

In light of this, it's curious that Techtronic Industries' P/E sits above the majority of other companies. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

What We Can Learn From Techtronic Industries' P/E?

The strong share price surge has got Techtronic Industries' P/E rushing to great heights as well. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Techtronic Industries currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Techtronic Industries you should know about.

You might be able to find a better investment than Techtronic Industries. 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.