The Zhejiang Baida Precision Manufacturing Corp. (SHSE:603331) share price has fared very poorly over the last month, falling by a substantial 27%. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 31% share price drop.

Since its price has dipped substantially, Zhejiang Baida Precision Manufacturing's price-to-earnings (or "P/E") ratio of 19.7x 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 28x and even P/E's above 51x 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.

Earnings have risen firmly for Zhejiang Baida Precision Manufacturing recently, which is pleasing to see. It might be that many expect the respectable earnings performance to degrade substantially, which has repressed the P/E. 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?

In order to justify its P/E ratio, Zhejiang Baida Precision Manufacturing would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered a decent 13% gain to the company's bottom line. Pleasingly, EPS has also lifted 60% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

This is in contrast to the rest of the market, which is expected to grow by 42% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's understandable that Zhejiang Baida Precision Manufacturing's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.

What We Can Learn From Zhejiang Baida Precision Manufacturing's P/E?

Zhejiang Baida Precision Manufacturing's P/E has taken a tumble along with its share price. 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.

As we suspected, our examination of Zhejiang Baida Precision Manufacturing revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. 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.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Zhejiang Baida Precision Manufacturing, and understanding these should be part of your investment process.

Of course, you might also be able to find a better stock than Zhejiang Baida Precision Manufacturing. 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.