To the annoyance of some shareholders, Huili Resources (Group) Limited (HKG:1303) shares are down a considerable 26% in the last month, which continues a horrid run for the company. Looking at the bigger picture, even after this poor month the stock is up 50% in the last year.

Although its price has dipped substantially, Huili Resources (Group)'s price-to-earnings (or "P/E") ratio of 3.4x might still make it look like a strong buy right now compared to the market in Hong Kong, where around half of the companies have P/E ratios above 10x and even P/E's above 20x are quite common. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

For instance, Huili Resources (Group)'s receding earnings in recent times would have to be some food for thought. One possibility is that the P/E is low because investors think the company won't do enough to avoid underperforming 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 far underperform the market for P/E ratios like Huili Resources (Group)'s to be considered reasonable.

Retrospectively, the last year delivered a frustrating 26% decrease to the company's bottom line. At least EPS has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 22% shows it's noticeably less attractive on an annualised basis.

With this information, we can see why Huili Resources (Group) is trading at a P/E lower than the market. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

The Bottom Line On Huili Resources (Group)'s P/E

Having almost fallen off a cliff, Huili Resources (Group)'s share price has pulled its P/E way down as well. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Huili Resources (Group) 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.

Plus, you should also learn about these 3 warning signs we've spotted with Huili Resources (Group) (including 1 which doesn't sit too well with us).

Of course, you might also be able to find a better stock than Huili Resources (Group). 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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