The Xiangtan Electrochemical Scientific Co.,Ltd (SZSE:002125) share price has fared very poorly over the last month, falling by a substantial 26%. For any long-term shareholders, the last month ends a year to forget by locking in a 54% share price decline.

Although its price has dipped substantially, Xiangtan Electrochemical ScientificLtd may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 17.7x, 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. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

Xiangtan Electrochemical ScientificLtd 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. If not, then existing shareholders will probably struggle to get excited about the future direction of the share price.

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

In order to justify its P/E ratio, Xiangtan Electrochemical ScientificLtd would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered a frustrating 42% decrease to the company's bottom line. However, a few very strong years before that means that it was still able to grow EPS by an impressive 2,174% 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.

Looking ahead now, EPS is anticipated to climb by 30% during the coming year according to the dual analysts following 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 Xiangtan Electrochemical ScientificLtd'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.

The Bottom Line On Xiangtan Electrochemical ScientificLtd's P/E

Xiangtan Electrochemical ScientificLtd's recently weak share price has pulled its P/E below most other companies. 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.

As we suspected, our examination of Xiangtan Electrochemical ScientificLtd's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. 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.

Before you take the next step, you should know about the 3 warning signs for Xiangtan Electrochemical ScientificLtd (1 makes us a bit uncomfortable!) that we have uncovered.

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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