With a median price-to-earnings (or "P/E") ratio of close to 29x in China, you could be forgiven for feeling indifferent about Shandong Mining Machinery Group Co., Ltd.'s (SZSE:002526) P/E ratio of 31.6x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

With earnings growth that's exceedingly strong of late, Shandong Mining Machinery Group has been doing very well. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If that doesn't eventuate, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

What Are Growth Metrics Telling Us About The P/E?

The only time you'd be comfortable seeing a P/E like Shandong Mining Machinery Group's is when the company's growth is tracking the market closely.

Taking a look back first, we see that the company grew earnings per share by an impressive 208% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 14% overall. 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 35% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

With this information, we find it concerning that Shandong Mining Machinery Group is trading at a fairly similar P/E to the market. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

The Final Word

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.

Our examination of Shandong Mining Machinery Group revealed its shrinking earnings over the medium-term aren't impacting its P/E as much as we would have predicted, given the market is set to grow. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.

Plus, you should also learn about these 2 warning signs we've spotted with Shandong Mining Machinery Group.

If you're unsure about the strength of Shandong Mining Machinery Group'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.