Shanghai Research Institute of Building Sciences Group Co., Ltd.'s (SHSE:603153) price-to-earnings (or "P/E") ratio of 27.5x might 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 37x and even P/E's above 74x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

The recently shrinking earnings for Shanghai Research Institute of Building Sciences Group have been in line with the market. It might be that many expect the company's earnings performance to degrade further, which has repressed the P/E. You'd much rather the company wasn't bleeding earnings if you still believe in the business. In saying that, existing shareholders may feel hopeful about the share price if the company's earnings continue tracking the market.

How Is Shanghai Research Institute of Building Sciences Group's Growth Trending?

In order to justify its P/E ratio, Shanghai Research Institute of Building Sciences Group would need to produce sluggish growth that's trailing the market.

If we review the last year of earnings, the company posted a result that saw barely any deviation from a year ago. That's essentially a continuation of what we've seen over the last three years, as its EPS growth has been virtually non-existent for that entire period. Therefore, it's fair to say that earnings growth has definitely eluded the company recently.

Turning to the outlook, the next year should generate growth of 13% as estimated by the only analyst watching the company. With the market predicted to deliver 40% growth , the company is positioned for a weaker earnings result.

With this information, we can see why Shanghai Research Institute of Building Sciences Group is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Key Takeaway

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Shanghai Research Institute of Building Sciences Group maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Shanghai Research Institute of Building Sciences Group you should know about.

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.