The Chengdu Shengbang Seals Co.,Ltd. (SZSE:301233) share price has fared very poorly over the last month, falling by a substantial 28%. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 34% in that time.

Even after such a large drop in price, there still wouldn't be many who think Chengdu Shengbang SealsLtd's price-to-earnings (or "P/E") ratio of 25.7x is worth a mention when the median P/E in China is similar at about 28x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

Earnings have risen firmly for Chengdu Shengbang SealsLtd recently, which is pleasing to see. It might be that many expect the respectable earnings performance to wane, which has kept the P/E from rising. 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 not quite in favour.

Does Growth Match The P/E?

Chengdu Shengbang SealsLtd's P/E ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the market.

If we review the last year of earnings growth, the company posted a terrific increase of 19%. However, this wasn't enough as the latest three year period has seen a very unpleasant 37% drop in EPS in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

In contrast to the company, the rest of the market is expected to grow by 42% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

With this information, we find it concerning that Chengdu Shengbang SealsLtd is trading at a fairly similar P/E to the market. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh on the share price eventually.

What We Can Learn From Chengdu Shengbang SealsLtd's P/E?

With its share price falling into a hole, the P/E for Chengdu Shengbang SealsLtd looks quite average now. 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 Chengdu Shengbang SealsLtd currently trades on a higher than expected P/E since its recent earnings have been in decline over the medium-term. Right now we are uncomfortable with the P/E as this earnings performance is unlikely to support a more positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Chengdu Shengbang SealsLtd you should know about.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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