Zhejiang Xinhua Chemical Co.,Ltd (SHSE:603867) shareholders won't be pleased to see that the share price has had a very rough month, dropping 29% and undoing the prior period's positive performance. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 36% share price drop.

Even after such a large drop in price, Zhejiang Xinhua ChemicalLtd's price-to-earnings (or "P/E") ratio of 15.1x might still make it look like a buy right now compared to the market in China, where around half of the companies have P/E ratios above 30x and even P/E's above 54x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Zhejiang Xinhua ChemicalLtd has been struggling lately as its earnings have declined faster 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.

Check out our latest analysis for Zhejiang Xinhua ChemicalLtd

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

In order to justify its P/E ratio, Zhejiang Xinhua ChemicalLtd would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered a frustrating 16% decrease to the company's bottom line. Still, the latest three year period has seen an excellent 62% overall rise in EPS, in spite of its unsatisfying short-term performance. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Turning to the outlook, the next year should generate growth of 17% as estimated by the only analyst watching the company. That's shaping up to be materially lower than the 42% growth forecast for the broader market.

In light of this, it's understandable that Zhejiang Xinhua ChemicalLtd's P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

What We Can Learn From Zhejiang Xinhua ChemicalLtd's P/E?

Zhejiang Xinhua ChemicalLtd's P/E has taken a tumble along with its share price. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Zhejiang Xinhua ChemicalLtd maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Plus, you should also learn about these 2 warning signs we've spotted with Zhejiang Xinhua ChemicalLtd (including 1 which is concerning).

Of course, you might also be able to find a better stock than Zhejiang Xinhua ChemicalLtd. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.