The Shanghai Zhongzhou Special Alloy Materials Co., Ltd. (SZSE:300963) share price has fared very poorly over the last month, falling by a substantial 26%. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 18% share price drop.

Although its price has dipped substantially, Shanghai Zhongzhou Special Alloy Materials may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 22.7x, since almost half of all companies in China have P/E ratios greater than 30x and even P/E's higher than 54x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Recent times have been quite advantageous for Shanghai Zhongzhou Special Alloy Materials as its earnings have been rising very briskly. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for Shanghai Zhongzhou Special Alloy Materials

How Is Shanghai Zhongzhou Special Alloy Materials' Growth Trending?

The only time you'd be truly comfortable seeing a P/E as low as Shanghai Zhongzhou Special Alloy Materials' is when the company's growth is on track to lag the market.

If we review the last year of earnings growth, the company posted a terrific increase of 34%. EPS has also lifted 13% in aggregate from three years ago, mostly thanks to the last 12 months of growth. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 42% shows it's noticeably less attractive on an annualised basis.

In light of this, it's understandable that Shanghai Zhongzhou Special Alloy Materials' P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.

The Key Takeaway

Shanghai Zhongzhou Special Alloy Materials' P/E has taken a tumble along with its share price. 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.

As we suspected, our examination of Shanghai Zhongzhou Special Alloy Materials revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Shanghai Zhongzhou Special Alloy Materials, and understanding should be part of your investment process.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and 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.