Ningbo Boway Alloy Material Company Limited's (SHSE:601137) price-to-earnings (or "P/E") ratio of 12.7x might make it look like a strong buy right now compared to the market in China, where around half of the companies have P/E ratios above 35x and even P/E's above 64x 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.

Ningbo Boway Alloy Material 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.

View our latest analysis for Ningbo Boway Alloy Material

Is There Any Growth For Ningbo Boway Alloy Material?

In order to justify its P/E ratio, Ningbo Boway Alloy Material would need to produce anemic growth that's substantially trailing the market.

Retrospectively, the last year delivered an exceptional 95% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 66% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the eight analysts covering the company suggest earnings should grow by 28% over the next year. That's shaping up to be materially lower than the 44% growth forecast for the broader market.

With this information, we can see why Ningbo Boway Alloy Material is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

What We Can Learn From Ningbo Boway Alloy Material's P/E?

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.

As we suspected, our examination of Ningbo Boway Alloy Material's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. 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.

Don't forget that there may be other risks. For instance, we've identified 4 warning signs for Ningbo Boway Alloy Material (2 don't sit too well with us) you should be aware of.

Of course, you might also be able to find a better stock than Ningbo Boway Alloy Material. 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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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.