The Tonking New Energy Group Holdings Limited (HKG:8326) share price has done very well over the last month, posting an excellent gain of 28%. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 39% over that time.

In spite of the firm bounce in price, given about half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") above 9x, you may still consider Tonking New Energy Group Holdings as a highly attractive investment with its 3.9x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

With earnings growth that's exceedingly strong of late, Tonking New Energy Group Holdings has been doing very well. 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.

Does Growth Match The Low P/E?

In order to justify its P/E ratio, Tonking New Energy Group Holdings would need to produce anemic growth that's substantially trailing the market.

Retrospectively, the last year delivered an exceptional 199% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 74% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

This is in contrast to the rest of the market, which is expected to grow by 23% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we can see why Tonking New Energy Group Holdings is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.

The Bottom Line On Tonking New Energy Group Holdings' P/E

Even after such a strong price move, Tonking New Energy Group Holdings' P/E still trails the rest of the market significantly. 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 Tonking New Energy Group Holdings revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. 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.

Before you take the next step, you should know about the 2 warning signs for Tonking New Energy Group Holdings that we have uncovered.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.