Qingdao Daneng Environmental Protection Equipment Co., Ltd. (SHSE:688501) shareholders would be excited to see that the share price has had a great month, posting a 41% gain and recovering from prior weakness. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 5.9% over the last year.

Although its price has surged higher, given about half the companies in China have price-to-earnings ratios (or "P/E's") above 34x, you may still consider Qingdao Daneng Environmental Protection Equipment as an attractive investment with its 19.8x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

Qingdao Daneng Environmental Protection Equipment 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 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?

The only time you'd be truly comfortable seeing a P/E as low as Qingdao Daneng Environmental Protection Equipment's 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 51%. The latest three year period has also seen an excellent 41% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to climb by 29% per annum during the coming three years according to the two analysts following the company. With the market only predicted to deliver 19% each year, the company is positioned for a stronger earnings result.

In light of this, it's peculiar that Qingdao Daneng Environmental Protection Equipment's P/E sits below the majority of other companies. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

The Bottom Line On Qingdao Daneng Environmental Protection Equipment's P/E

Despite Qingdao Daneng Environmental Protection Equipment's shares building up a head of steam, its P/E still lags most other companies. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

Our examination of Qingdao Daneng Environmental Protection Equipment's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E anywhere near as much as we would have predicted. There could be some major unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Qingdao Daneng Environmental Protection Equipment (at least 1 which is a bit unpleasant), and understanding these should be part of your investment process.

If you're unsure about the strength of Qingdao Daneng Environmental Protection Equipment's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.