When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 28x, you may consider Power Construction Corporation of China, Ltd (SHSE:601669) as a highly attractive investment with its 7x P/E ratio. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

Recent earnings growth for Power Construction Corporation of China has been in line with the market. It might be that many expect the mediocre earnings performance to degrade, which has repressed the P/E. If not, then existing shareholders have reason to be optimistic about the future direction of the share price.

What Are Growth Metrics Telling Us About The Low P/E?

Power Construction Corporation of China'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.

Taking a look back first, we see that there was hardly any earnings per share growth to speak of for the company over the past year. However, a few strong years before that means that it was still able to grow EPS by an impressive 46% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to climb by 16% per year during the coming three years according to the seven analysts following the company. With the market predicted to deliver 24% growth per year, the company is positioned for a weaker earnings result.

In light of this, it's understandable that Power Construction Corporation of China's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Final Word

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 Power Construction Corporation of China maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Before you settle on your opinion, we've discovered 2 warning signs for Power Construction Corporation of China (1 makes us a bit uncomfortable!) that you should be aware of.

If these risks are making you reconsider your opinion on Power Construction Corporation of China, 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com