The Jiangsu Changhai Composite Materials Co., Ltd (SZSE:300196) share price has done very well over the last month, posting an excellent gain of 37%. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 3.2% in the last twelve months.

In spite of the firm bounce in price, Jiangsu Changhai Composite Materials may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 25.3x, since almost half of all companies in China have P/E ratios greater than 34x and even P/E's higher than 64x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

Jiangsu Changhai Composite Materials has been struggling lately as its earnings have declined faster than most other companies. It seems that many are expecting the dismal earnings performance to persist, which has repressed the P/E. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. Or at the very least, you'd be hoping the earnings slide doesn't get any worse if your plan is to pick up some stock while it's out of favour.

Is There Any Growth For Jiangsu Changhai Composite Materials?

There's an inherent assumption that a company should underperform the market for P/E ratios like Jiangsu Changhai Composite Materials' to be considered reasonable.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 66%. This means it has also seen a slide in earnings over the longer-term as EPS is down 49% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 40% per year during the coming three years according to the nine analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 19% per year, which is noticeably less attractive.

With this information, we find it odd that Jiangsu Changhai Composite Materials is trading at a P/E lower than the market. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

The Bottom Line On Jiangsu Changhai Composite Materials' P/E

Despite Jiangsu Changhai Composite Materials' shares building up a head of steam, its P/E still lags most other companies. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Jiangsu Changhai Composite Materials currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.

Plus, you should also learn about these 2 warning signs we've spotted with Jiangsu Changhai Composite Materials.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.