Wuchan Zhongda Geron Co.,Ltd. (SZSE:002722) shareholders have had their patience rewarded with a 25% share price jump in the last month. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 5.4% in the last twelve months.

In spite of the firm bounce in price, given about half the companies in China have price-to-earnings ratios (or "P/E's") above 27x, you may still consider Wuchan Zhongda GeronLtd as an attractive investment with its 17.9x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Wuchan Zhongda GeronLtd certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. 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?

There's an inherent assumption that a company should underperform the market for P/E ratios like Wuchan Zhongda GeronLtd's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 44%. The latest three year period has also seen an excellent 66% overall rise in EPS, aided 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.

Looking ahead now, EPS is anticipated to climb by 8.6% per year during the coming three years according to the only analyst following the company. With the market predicted to deliver 19% growth each year, the company is positioned for a weaker earnings result.

In light of this, it's understandable that Wuchan Zhongda GeronLtd'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

Wuchan Zhongda GeronLtd's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Wuchan Zhongda GeronLtd 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.

You always need to take note of risks, for example - Wuchan Zhongda GeronLtd has 1 warning sign we think you should be aware of.

If these risks are making you reconsider your opinion on Wuchan Zhongda GeronLtd, 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.