Hongrun Construction Group Co., Ltd. (SZSE:002062) shareholders that were waiting for something to happen have been dealt a blow with a 26% share price drop in the last month. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 45% in that time.

Although its price has dipped substantially, Hongrun Construction Group's price-to-earnings (or "P/E") ratio of 9x might still 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 26x and even P/E's above 45x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

The earnings growth achieved at Hongrun Construction Group over the last year would be more than acceptable for most companies. One possibility is that the P/E is low because investors think this respectable earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be optimistic about the future direction of the share price.

How Is Hongrun Construction Group's Growth Trending?

In order to justify its P/E ratio, Hongrun Construction Group would need to produce anemic growth that's substantially trailing the market.

Retrospectively, the last year delivered a decent 8.5% gain to the company's bottom line. The latest three year period has also seen a 9.3% overall rise in EPS, aided somewhat by its short-term performance. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

This is in contrast to the rest of the market, which is expected to grow by 41% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we can see why Hongrun Construction Group is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.

What We Can Learn From Hongrun Construction Group's P/E?

Shares in Hongrun Construction Group have plummeted and its P/E is now low enough to touch the ground. 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.

We've established that Hongrun Construction Group maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.

It is also worth noting that we have found 1 warning sign for Hongrun Construction Group that you need to take into consideration.

If these risks are making you reconsider your opinion on Hongrun Construction Group, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.