Sichuan Guangan Aaa Public Co.,Ltd (SHSE:600979) shareholders that were waiting for something to happen have been dealt a blow with a 26% share price drop in the last month. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 22% in that time.

In spite of the heavy fall in price, Sichuan Guangan Aaa PublicLtd may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 18.4x, since almost half of all companies in China have P/E ratios greater than 27x and even P/E's higher than 48x 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.

Sichuan Guangan Aaa PublicLtd has been doing a decent job lately as it's been growing earnings at a reasonable pace. One possibility is that the P/E is low because investors think this good earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders may have reason to be optimistic about the future direction of the share price.

Does Growth Match The Low P/E?

In order to justify its P/E ratio, Sichuan Guangan Aaa PublicLtd would need to produce sluggish growth that's trailing the market.

If we review the last year of earnings growth, the company posted a worthy increase of 6.0%. Ultimately though, it couldn't turn around the poor performance of the prior period, with EPS shrinking 13% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 41% shows it's an unpleasant look.

With this information, we are not surprised that Sichuan Guangan Aaa PublicLtd 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.

The Bottom Line On Sichuan Guangan Aaa PublicLtd's P/E

Sichuan Guangan Aaa PublicLtd's P/E has taken a tumble along with its share price. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Sichuan Guangan Aaa PublicLtd 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.

Before you settle on your opinion, we've discovered 3 warning signs for Sichuan Guangan Aaa PublicLtd (1 doesn't sit too well with us!) that you should be aware of.

Of course, you might also be able to find a better stock than Sichuan Guangan Aaa PublicLtd. 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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