Hunan Warrant Pharmaceutical Co.,Ltd (SHSE:688799) shares have had a really impressive month, gaining 38% after a shaky period beforehand. Looking back a bit further, it's encouraging to see the stock is up 28% in the last year.

Even after such a large jump in price, Hunan Warrant PharmaceuticalLtd's price-to-earnings (or "P/E") ratio of 22.7x might still make it look like a buy right now compared to the market in China, where around half of the companies have P/E ratios above 34x and even P/E's above 64x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

For example, consider that Hunan Warrant PharmaceuticalLtd's financial performance has been pretty ordinary lately as earnings growth is non-existent. One possibility is that the P/E is low because investors think this benign earnings growth rate will likely underperform the broader market in the near future. 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.

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

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

Retrospectively, the last year delivered virtually the same number to the company's bottom line as the year before. The longer-term trend has been no better as the company has no earnings growth to show for over the last three years either. Accordingly, shareholders probably wouldn't have been satisfied with the complete absence of medium-term growth.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 37% shows it's noticeably less attractive on an annualised basis.

In light of this, it's understandable that Hunan Warrant PharmaceuticalLtd's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.

The Final Word

Hunan Warrant PharmaceuticalLtd'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 Hunan Warrant PharmaceuticalLtd maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, 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 the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Hunan Warrant PharmaceuticalLtd, and understanding should be part of your investment process.

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.