With a median price-to-earnings (or "P/E") ratio of close to 32x in China, you could be forgiven for feeling indifferent about Tianjin Teda Co., Ltd.'s (SZSE:000652) P/E ratio of 31.1x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

For instance, Tianjin Teda's receding earnings in recent times would have to be some food for thought. It might be that many expect the company to put the disappointing earnings performance behind them over the coming period, which has kept the P/E from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.

How Is Tianjin Teda's Growth Trending?

The only time you'd be comfortable seeing a P/E like Tianjin Teda's is when the company's growth is tracking the market closely.

Retrospectively, the last year delivered a frustrating 27% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 46% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

In contrast to the company, the rest of the market is expected to grow by 40% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

In light of this, it's somewhat alarming that Tianjin Teda's P/E sits in line with the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh on the share price eventually.

The Bottom Line On Tianjin Teda's P/E

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of Tianjin Teda revealed its shrinking earnings over the medium-term aren't impacting its P/E as much as we would have predicted, given the market is set to grow. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.

There are also other vital risk factors to consider and we've discovered 3 warning signs for Tianjin Teda (2 are a bit concerning!) that you should be aware of before investing here.

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.