Anhui Anfu Battery Technology Co.,Ltd (SHSE:603031) shareholders would be excited to see that the share price has had a great month, posting a 33% gain and recovering from prior weakness. Taking a wider view, although not as strong as the last month, the full year gain of 21% is also fairly reasonable.

Since its price has surged higher, Anhui Anfu Battery TechnologyLtd may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 71.8x, since almost half of all companies in China have P/E ratios under 30x and even P/E's lower than 18x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Recent times have been advantageous for Anhui Anfu Battery TechnologyLtd as its earnings have been rising faster than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

Want the full picture on analyst estimates for the company? Then our free report on Anhui Anfu Battery TechnologyLtd will help you uncover what's on the horizon.

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

Anhui Anfu Battery TechnologyLtd'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.

If we review the last year of earnings growth, the company posted a terrific increase of 38%. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Turning to the outlook, the next year should generate growth of 52% as estimated by the one analyst watching the company. With the market only predicted to deliver 39%, the company is positioned for a stronger earnings result.

With this information, we can see why Anhui Anfu Battery TechnologyLtd is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

The strong share price surge has got Anhui Anfu Battery TechnologyLtd'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.

As we suspected, our examination of Anhui Anfu Battery TechnologyLtd's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. 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.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Anhui Anfu Battery TechnologyLtd you should know about.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.