Jiangsu Dingsheng New Materials Joint-Stock Co.,Ltd's (SHSE:603876) price-to-earnings (or "P/E") ratio of 12.4x might make it look like a strong buy right now compared to the market in China, where around half of the companies have P/E ratios above 35x and even P/E's above 64x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

Recent times haven't been advantageous for Jiangsu Dingsheng New Materials Ltd as its earnings have been falling quicker than most other companies. It seems that many are expecting the dismal earnings performance to persist, which has repressed the P/E. 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.

See our latest analysis for Jiangsu Dingsheng New Materials Ltd

Does Growth Match The Low P/E?

In order to justify its P/E ratio, Jiangsu Dingsheng New Materials Ltd would need to produce anemic growth that's substantially trailing the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 33%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 544% in total over the last three years. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Turning to the outlook, the next year should generate growth of 64% as estimated by the five analysts watching the company. That's shaping up to be materially higher than the 43% growth forecast for the broader market.

With this information, we find it odd that Jiangsu Dingsheng New Materials Ltd is trading at a P/E lower than the market. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

What We Can Learn From Jiangsu Dingsheng New Materials Ltd'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.

We've established that Jiangsu Dingsheng New Materials Ltd currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. 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.

Plus, you should also learn about this 1 warning sign we've spotted with Jiangsu Dingsheng New Materials Ltd.

If you're unsure about the strength of Jiangsu Dingsheng New Materials Ltd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.