Shenzhen Transsion Holdings Co., Ltd.'s (SHSE:688036) price-to-earnings (or "P/E") ratio of 25.5x might make it look like a buy right now compared to the market in China, where around half of the companies have P/E ratios above 34x and even P/E's above 62x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Shenzhen Transsion Holdings has been doing quite well of late. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Check out our latest analysis for Shenzhen Transsion Holdings

How Is Shenzhen Transsion Holdings' Growth Trending?

There's an inherent assumption that a company should underperform the market for P/E ratios like Shenzhen Transsion Holdings' to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 25% last year. The latest three year period has also seen an excellent 67% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next year should generate growth of 44% as estimated by the analysts watching the company. That's shaping up to be similar to the 44% growth forecast for the broader market.

With this information, we find it odd that Shenzhen Transsion Holdings is trading at a P/E lower than the market. Apparently some shareholders are doubtful of the forecasts and have been accepting lower selling prices.

What We Can Learn From Shenzhen Transsion Holdings' P/E?

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Shenzhen Transsion Holdings currently trades on a lower than expected P/E since its forecast growth is in line with the wider market. There could be some unobserved threats to earnings preventing the P/E ratio from matching the outlook. It appears some are indeed anticipating earnings instability, because these conditions should normally provide more support to the share price.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Shenzhen Transsion Holdings 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.