Shanghai Runda Medical Technology Co., Ltd. (SHSE:603108) shareholders won't be pleased to see that the share price has had a very rough month, dropping 25% and undoing the prior period's positive performance. Looking at the bigger picture, even after this poor month the stock is up 81% in the last year.

Since its price has dipped substantially, Shanghai Runda Medical Technology's price-to-earnings (or "P/E") ratio of 28.2x 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 35x and even P/E's above 63x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

Recent times have been pleasing for Shanghai Runda Medical Technology as its earnings have risen in spite of the market's earnings going into reverse. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. 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.

See our latest analysis for Shanghai Runda Medical Technology

How Is Shanghai Runda Medical Technology's Growth Trending?

In order to justify its P/E ratio, Shanghai Runda Medical Technology would need to produce sluggish growth that's trailing the market.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 7.9% last year. Pleasingly, EPS has also lifted 51% in aggregate from three years ago, partly thanks to the last 12 months of growth. 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 48% as estimated by the lone analyst watching the company. Meanwhile, the rest of the market is forecast to only expand by 43%, which is noticeably less attractive.

In light of this, it's peculiar that Shanghai Runda Medical Technology's P/E sits below the majority of other companies. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

The Bottom Line On Shanghai Runda Medical Technology's P/E

Shanghai Runda Medical Technology's recently weak share price has pulled its P/E below most other companies. 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.

We've established that Shanghai Runda Medical Technology currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. It appears many are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 4 warning signs with Shanghai Runda Medical Technology (at least 2 which are a bit concerning), and understanding these should be part of your investment process.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.