With a price-to-earnings (or "P/E") ratio of 19.7x Wuxi Paike New Materials Technology Co.,Ltd. (SHSE:605123) may be sending bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 35x and even P/E's higher than 68x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

Wuxi Paike New Materials TechnologyLtd has been struggling lately as its earnings have declined faster than most other companies. The P/E is probably low because investors think this poor earnings performance isn't going to improve at all. You'd much rather the company wasn't bleeding earnings if you still believe in the business. Or at the very least, you'd be hoping the earnings slide doesn't get any worse if your plan is to pick up some stock while it's out of favour.

Does Growth Match The Low P/E?

There's an inherent assumption that a company should underperform the market for P/E ratios like Wuxi Paike New Materials TechnologyLtd's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 43% decrease to the company's bottom line. This has soured the latest three-year period, which nevertheless managed to deliver a decent 9.1% overall rise in EPS. So we can start by confirming that the company has generally done a good job of growing earnings over that time, even though it had some hiccups along the way.

Looking ahead now, EPS is anticipated to climb by 100% during the coming year according to the three analysts following the company. That's shaping up to be materially higher than the 38% growth forecast for the broader market.

With this information, we find it odd that Wuxi Paike New Materials TechnologyLtd is trading at a P/E lower than the market. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

The Bottom Line On Wuxi Paike New Materials TechnologyLtd's P/E

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

Our examination of Wuxi Paike New Materials TechnologyLtd'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. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.

It is also worth noting that we have found 2 warning signs for Wuxi Paike New Materials TechnologyLtd that you need to take into consideration.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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