China Chengtong Development Group Limited (HKG:217) shares have had a horrible month, losing 25% after a relatively good period beforehand. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 29% share price drop.

In spite of the heavy fall in price, China Chengtong Development Group may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 4.7x, since almost half of all companies in Hong Kong have P/E ratios greater than 9x and even P/E's higher than 18x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Recent times have been quite advantageous for China Chengtong Development Group as its earnings have been rising very briskly. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Is There Any Growth For China Chengtong Development Group?

There's an inherent assumption that a company should underperform the market for P/E ratios like China Chengtong Development Group's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 31% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 108% 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.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 23% shows it's noticeably more attractive on an annualised basis.

With this information, we find it odd that China Chengtong Development Group is trading at a P/E lower than the market. It looks like most investors are not convinced the company can maintain its recent growth rates.

The Key Takeaway

The softening of China Chengtong Development Group's shares means its P/E is now sitting at a pretty low level. 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.

We've established that China Chengtong Development Group currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. At least price risks look to be very low if recent medium-term earnings trends continue, but investors seem to think future earnings could see a lot of volatility.

Before you take the next step, you should know about the 4 warning signs for China Chengtong Development Group (2 shouldn't be ignored!) that we have uncovered.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.