Guangdong Dongfang Precision Science & Technology Co., Ltd. (SZSE:002611) shareholders would be excited to see that the share price has had a great month, posting a 44% gain and recovering from prior weakness. Looking back a bit further, it's encouraging to see the stock is up 43% in the last year.

In spite of the firm bounce in price, Guangdong Dongfang Precision Science & Technology's price-to-earnings (or "P/E") ratio of 14.6x might still make it look like a strong buy right now compared to the market in China, where around half of the companies have P/E ratios above 31x and even P/E's above 57x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.

Recent times have been quite advantageous for Guangdong Dongfang Precision Science & Technology as its earnings have been rising very briskly. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. 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 out of favour.

Is There Any Growth For Guangdong Dongfang Precision Science & Technology?

Guangdong Dongfang Precision Science & Technology's P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.

If we review the last year of earnings growth, the company posted a terrific increase of 84%. However, this wasn't enough as the latest three year period has seen a very unpleasant 56% drop in EPS in aggregate. 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 41% 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 Dongfang Precision Science & Technology 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 Guangdong Dongfang Precision Science & Technology's P/E

Even after such a strong price move, Guangdong Dongfang Precision Science & Technology's P/E still trails the rest of the market significantly. 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 Guangdong Dongfang Precision Science & Technology maintains its low P/E on the weakness of its sliding earnings over the medium-term, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

You should always think about risks. Case in point, we've spotted 2 warning signs for Guangdong Dongfang Precision Science & Technology you should be aware of.

If these risks are making you reconsider your opinion on Guangdong Dongfang Precision Science & Technology, 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.