Despite an already strong run, Zhejiang Oceanking Development Co., Ltd. (SHSE:603213) shares have been powering on, with a gain of 27% in the last thirty days. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 3.5% in the last twelve months.

Even after such a large jump in price, given about half the companies in China have price-to-earnings ratios (or "P/E's") above 36x, you may still consider Zhejiang Oceanking Development as an attractive investment with its 19.4x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Zhejiang Oceanking Development has been doing a good job lately as it's been growing earnings at a solid pace. It might be that many expect the respectable earnings performance to degrade substantially, which has repressed the P/E. If that doesn't eventuate, then existing shareholders have reason to be optimistic about the future direction of the share price.

How Is Zhejiang Oceanking Development's Growth Trending?

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

Retrospectively, the last year delivered a decent 9.4% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen an unpleasant 35% overall drop in EPS. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 38% shows it's an unpleasant look.

In light of this, it's understandable that Zhejiang Oceanking Development's 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. 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 Zhejiang Oceanking Development's P/E

The latest share price surge wasn't enough to lift Zhejiang Oceanking Development's P/E close to the market median. 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.

We've established that Zhejiang Oceanking Development maintains its low P/E on the weakness of its sliding earnings over the medium-term, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Before you take the next step, you should know about the 2 warning signs for Zhejiang Oceanking Development (1 is a bit unpleasant!) that we have uncovered.

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

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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.