Despite an already strong run, CITIC Offshore Helicopter Co., Ltd. (SZSE:000099) shares have been powering on, with a gain of 67% in the last thirty days. The annual gain comes to 192% following the latest surge, making investors sit up and take notice.

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 CITIC Offshore Helicopter as a stock to avoid entirely with its 72.2x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

CITIC Offshore Helicopter certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Does Growth Match The High P/E?

In order to justify its P/E ratio, CITIC Offshore Helicopter would need to produce outstanding growth well in excess of the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 24% last year. However, this wasn't enough as the latest three year period has seen a very unpleasant 14% drop in EPS in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 16% during the coming year according to the one analyst following the company. With the market predicted to deliver 35% growth , the company is positioned for a weaker earnings result.

With this information, we find it concerning that CITIC Offshore Helicopter 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.

What We Can Learn From CITIC Offshore Helicopter's P/E?

CITIC Offshore Helicopter's P/E is flying high just like its stock has during the last month. 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.

We've established that CITIC Offshore Helicopter currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. 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. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with CITIC Offshore Helicopter, and understanding should be part of your investment process.

Of course, you might also be able to find a better stock than CITIC Offshore Helicopter. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.