The Guangdong Redwall New Materials Co., Ltd. (SZSE:002809) share price has fared very poorly over the last month, falling by a substantial 26%. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 21% share price drop.

In spite of the heavy fall in price, Guangdong Redwall New Materials may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 18.7x, since almost half of all companies in China have P/E ratios greater than 28x and even P/E's higher than 51x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Earnings have risen firmly for Guangdong Redwall New Materials recently, which is pleasing to see. 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 Guangdong Redwall New Materials' Growth Trending?

In order to justify its P/E ratio, Guangdong Redwall New Materials would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered a decent 7.9% gain to the company's bottom line. Ultimately though, it couldn't turn around the poor performance of the prior period, with EPS shrinking 35% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

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 are not surprised that Guangdong Redwall New Materials is trading at a P/E lower than the market. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

What We Can Learn From Guangdong Redwall New Materials' P/E?

Guangdong Redwall New Materials' P/E has taken a tumble along with its share price. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Guangdong Redwall New Materials revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Having said that, be aware Guangdong Redwall New Materials is showing 2 warning signs in our investment analysis, you should know about.

If these risks are making you reconsider your opinion on Guangdong Redwall New Materials, 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.