With a price-to-earnings (or "P/E") ratio of 24.3x Jiangsu Xinquan Automotive Trim Co.,Ltd. (SHSE:603179) may be sending bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 30x and even P/E's higher than 56x 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 earnings growth that's superior to most other companies of late, Jiangsu Xinquan Automotive TrimLtd has been doing relatively well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Does Growth Match The Low P/E?

The only time you'd be truly comfortable seeing a P/E as low as Jiangsu Xinquan Automotive TrimLtd's is when the company's growth is on track to lag the market.

If we review the last year of earnings growth, the company posted a terrific increase of 59%. The strong recent performance means it was also able to grow EPS by 159% 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.

Turning to the outlook, the next three years should generate growth of 26% each year as estimated by the eight analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 25% per annum, which is not materially different.

In light of this, it's peculiar that Jiangsu Xinquan Automotive TrimLtd's P/E sits below the majority of other companies. It may be that most investors are not convinced the company can achieve future growth expectations.

What We Can Learn From Jiangsu Xinquan Automotive TrimLtd'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.

Our examination of Jiangsu Xinquan Automotive TrimLtd's analyst forecasts revealed that its market-matching earnings outlook isn't contributing to its P/E as much as we would have predicted. There could be some unobserved threats to earnings preventing the P/E ratio from matching the outlook. It appears some are indeed anticipating earnings instability, because these conditions should normally provide more support to the share price.

There are also other vital risk factors to consider and we've discovered 2 warning signs for Jiangsu Xinquan Automotive TrimLtd (1 doesn't sit too well with us!) that you should be aware of before investing here.

Of course, you might also be able to find a better stock than Jiangsu Xinquan Automotive TrimLtd. 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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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.