360 Ludashi Holdings Limited (HKG:3601) shareholders have had their patience rewarded with a 33% share price jump in the last month. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 5.5% in the last twelve months.

Even after such a large jump in price, 360 Ludashi Holdings' price-to-earnings (or "P/E") ratio of 7.4x might still make it look like a buy right now compared to the market in Hong Kong, where around half of the companies have P/E ratios above 11x and even P/E's above 21x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

For example, consider that 360 Ludashi Holdings' financial performance has been poor lately as its earnings have been in decline. It might be that many expect the disappointing earnings performance to continue or accelerate, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

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

There's an inherent assumption that a company should underperform the market for P/E ratios like 360 Ludashi Holdings' to be considered reasonable.

Retrospectively, the last year delivered a frustrating 48% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 29% in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Comparing that to the market, which is predicted to deliver 22% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

In light of this, it's understandable that 360 Ludashi Holdings' P/E would sit below the majority of other companies. However, we think shrinking earnings are unlikely to lead to a stable P/E over the longer term, which could set up shareholders for future disappointment. Even just maintaining these prices could be difficult to achieve as recent earnings trends are already weighing down the shares.

The Bottom Line On 360 Ludashi Holdings' P/E

Despite 360 Ludashi Holdings' shares building up a head of steam, its P/E still lags most other companies. 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.

As we suspected, our examination of 360 Ludashi Holdings revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. If recent medium-term earnings trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

It is also worth noting that we have found 4 warning signs for 360 Ludashi Holdings (2 are potentially serious!) that you need to take into consideration.

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.