Guangdong Hoshion Industrial Aluminium Co., Ltd. (SZSE:002824) shareholders won't be pleased to see that the share price has had a very rough month, dropping 25% and undoing the prior period's positive performance. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 40% share price drop.

In spite of the heavy fall in price, Guangdong Hoshion Industrial Aluminium's price-to-earnings (or "P/E") ratio of 25.7x 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 32x and even P/E's above 57x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Recent times haven't been advantageous for Guangdong Hoshion Industrial Aluminium as its earnings have been falling quicker than most other companies. It seems that many are expecting the dismal earnings performance to persist, which has repressed the P/E. You'd much rather the company wasn't bleeding earnings if you still believe in the business. 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.

Check out our latest analysis for Guangdong Hoshion Industrial Aluminium

Does Growth Match The Low P/E?

There's an inherent assumption that a company should underperform the market for P/E ratios like Guangdong Hoshion Industrial Aluminium's to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 29%. Even so, admirably EPS has lifted 403% in aggregate from three years ago, notwithstanding the last 12 months. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Shifting to the future, estimates from the lone analyst covering the company suggest earnings should grow by 81% over the next year. Meanwhile, the rest of the market is forecast to only expand by 42%, which is noticeably less attractive.

In light of this, it's peculiar that Guangdong Hoshion Industrial Aluminium's P/E sits below the majority of other companies. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

What We Can Learn From Guangdong Hoshion Industrial Aluminium's P/E?

The softening of Guangdong Hoshion Industrial Aluminium's shares means its P/E is now sitting at a pretty low level. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Guangdong Hoshion Industrial Aluminium 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.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Guangdong Hoshion Industrial Aluminium that you should be aware of.

If you're unsure about the strength of Guangdong Hoshion Industrial Aluminium's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.