Unfortunately for some shareholders, the Wolong Resources Group Co., Ltd. (SHSE:600173) share price has dived 26% in the last thirty days, prolonging recent pain. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 35% share price drop.

Following the heavy fall in price, Wolong Resources Group may be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 14.1x, since almost half of all companies in China have P/E ratios greater than 25x and even P/E's higher than 44x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

As an illustration, earnings have deteriorated at Wolong Resources Group over the last year, which is not ideal at all. 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. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

Does Growth Match The Low P/E?

The only time you'd be truly comfortable seeing a P/E as low as Wolong Resources Group's is when the company's growth is on track to lag the market.

Retrospectively, the last year delivered a frustrating 58% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 55% in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

In contrast to the company, the rest of the market is expected to grow by 42% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

In light of this, it's understandable that Wolong Resources Group's P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Key Takeaway

Wolong Resources Group's recently weak share price has pulled its P/E below most other companies. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Wolong Resources Group revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Before you settle on your opinion, we've discovered 4 warning signs for Wolong Resources Group (2 are concerning!) that you should be aware of.

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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