With a price-to-earnings (or "P/E") ratio of 20.4x Xiamen R&T Plumbing Technology Co.,Ltd. (SZSE:002790) may be sending bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 31x and even P/E's higher than 57x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Xiamen R&T Plumbing TechnologyLtd has been doing quite well of late. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, 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 Xiamen R&T Plumbing TechnologyLtd?

The only time you'd be truly comfortable seeing a P/E as low as Xiamen R&T Plumbing TechnologyLtd's is when the company's growth is on track to lag the market.

Retrospectively, the last year delivered a decent 3.9% gain to the company's bottom line. The latest three year period has also seen an excellent 90% overall rise in EPS, aided somewhat by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next year should generate growth of 31% as estimated by the five analysts watching the company. That's shaping up to be materially lower than the 41% growth forecast for the broader market.

In light of this, it's understandable that Xiamen R&T Plumbing TechnologyLtd'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 Xiamen R&T Plumbing TechnologyLtd's P/E

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.

As we suspected, our examination of Xiamen R&T Plumbing TechnologyLtd's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. 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 1 warning sign for Xiamen R&T Plumbing TechnologyLtd that we have uncovered.

Of course, you might also be able to find a better stock than Xiamen R&T Plumbing TechnologyLtd. 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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