Yongxing Special Materials Technology Co.,Ltd (SZSE:002756) shareholders have had their patience rewarded with a 26% share price jump in the last month. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 21% over that time.

Although its price has surged higher, Yongxing Special Materials TechnologyLtd may still be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 5.7x, since almost half of all companies in China have P/E ratios greater than 31x and even P/E's higher than 56x are not unusual. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

Yongxing Special Materials TechnologyLtd certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. 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 not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

What Are Growth Metrics Telling Us About The Low P/E?

The only time you'd be truly comfortable seeing a P/E as depressed as Yongxing Special Materials TechnologyLtd's is when the company's growth is on track to lag the market decidedly.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 8.2% last year. The latest three year period has also seen an excellent 1,768% overall rise in EPS, aided somewhat by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the eight analysts covering the company suggest earnings growth is heading into negative territory, declining 37% over the next year. With the market predicted to deliver 41% growth , that's a disappointing outcome.

In light of this, it's understandable that Yongxing Special Materials TechnologyLtd's P/E would sit below the majority of other companies. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Bottom Line On Yongxing Special Materials TechnologyLtd's P/E

Even after such a strong price move, Yongxing Special Materials TechnologyLtd's P/E still trails the rest of the market significantly. 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 Yongxing Special Materials TechnologyLtd maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. 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.

Having said that, be aware Yongxing Special Materials TechnologyLtd is showing 2 warning signs in our investment analysis, and 1 of those is significant.

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.