When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 32x, you may consider Quick Intelligent Equipment Co.,Ltd. (SHSE:603203) as an attractive investment with its 26.4x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Recent times haven't been advantageous for Quick Intelligent EquipmentLtd as its earnings have been falling quicker than most other companies. The P/E is probably low because investors think this poor earnings performance isn't going to improve at all. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. Or at the very least, you'd be hoping the earnings slide doesn't get any worse if your plan is to pick up some stock while it's out of favour.

See our latest analysis for Quick Intelligent EquipmentLtd

Does Growth Match The Low P/E?

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

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 23%. That put a dampener on the good run it was having over the longer-term as its three-year EPS growth is still a noteworthy 14% in total. So we can start by confirming that the company has generally done a good job of growing earnings over that time, even though it had some hiccups along the way.

Turning to the outlook, the next year should generate growth of 28% as estimated by the only analyst watching the company. Meanwhile, the rest of the market is forecast to expand by 42%, which is noticeably more attractive.

With this information, we can see why Quick Intelligent EquipmentLtd is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Final Word

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of Quick Intelligent EquipmentLtd's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

You always need to take note of risks, for example - Quick Intelligent EquipmentLtd has 1 warning sign we think you should be aware of.

If you're unsure about the strength of Quick Intelligent EquipmentLtd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.