The Suzhou Alton Electrical & Mechanical Industry Co., Ltd. (SZSE:301187) share price has done very well over the last month, posting an excellent gain of 26%. Looking back a bit further, it's encouraging to see the stock is up 35% in the last year.

Even after such a large jump in price, Suzhou Alton Electrical & Mechanical Industry may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 23.1x, since almost half of all companies in China have P/E ratios greater than 28x and even P/E's higher than 52x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

Suzhou Alton Electrical & Mechanical Industry certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong 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.

How Is Suzhou Alton Electrical & Mechanical Industry's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as low as Suzhou Alton Electrical & Mechanical Industry's is when the company's growth is on track to lag the market.

If we review the last year of earnings growth, the company posted a terrific increase of 51%. Still, EPS has barely risen at all from three years ago in total, which is not ideal. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Turning to the outlook, the next three years should generate growth of 14% each year as estimated by the two analysts watching the company. That's shaping up to be materially lower than the 25% each year growth forecast for the broader market.

With this information, we can see why Suzhou Alton Electrical & Mechanical Industry is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Key Takeaway

Despite Suzhou Alton Electrical & Mechanical Industry's shares building up a head of steam, its P/E still lags most other companies. 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 Suzhou Alton Electrical & Mechanical Industry maintains its low P/E on the weakness of its forecast growth being lower than the wider market, 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. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Suzhou Alton Electrical & Mechanical Industry (of which 1 is significant!) you should know about.

Of course, you might also be able to find a better stock than Suzhou Alton Electrical & Mechanical Industry. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com