To the annoyance of some shareholders, PhiChem Corporation (SZSE:300398) shares are down a considerable 27% in the last month, which continues a horrid run for the company. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 39% in that time.

Although its price has dipped substantially, PhiChem may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 18.2x, since almost half of all companies in China have P/E ratios greater than 28x and even P/E's higher than 51x are not unusual. 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 haven't been advantageous for PhiChem 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. If not, then existing shareholders will probably struggle to get excited about the future direction of the share price.

Is There Any Growth For PhiChem?

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

Retrospectively, the last year delivered a frustrating 26% decrease to the company's bottom line. However, a few very strong years before that means that it was still able to grow EPS by an impressive 32% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Shifting to the future, estimates from the three analysts covering the company suggest earnings should grow by 40% over the next year. With the market predicted to deliver 42% growth , the company is positioned for a comparable earnings result.

With this information, we find it odd that PhiChem is trading at a P/E lower than the market. It may be that most investors are not convinced the company can achieve future growth expectations.

What We Can Learn From PhiChem's P/E?

PhiChem's 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.

We've established that PhiChem currently trades on a lower than expected P/E since its forecast growth is in line with the wider market. When we see an average earnings outlook with market-like growth, we assume potential risks are what might be placing pressure on the P/E ratio. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

Before you take the next step, you should know about the 1 warning sign for PhiChem that we have uncovered.

If these risks are making you reconsider your opinion on PhiChem, explore our interactive list of high quality stocks to get an idea of what else is out there.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.