Hangzhou Turbine Power Group Co., Ltd. (SZSE:200771) shares have continued their recent momentum with a 29% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 43% in the last year.

In spite of the firm bounce in price, Hangzhou Turbine Power Group's price-to-earnings (or "P/E") ratio of 24.9x might still 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 38x and even P/E's above 75x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Earnings have risen firmly for Hangzhou Turbine Power Group recently, which is pleasing to see. 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 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?

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

Taking a look back first, we see that the company managed to grow earnings per share by a handy 12% last year. Still, lamentably EPS has fallen 31% in aggregate from three years ago, which is disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 40% shows it's an unpleasant look.

In light of this, it's understandable that Hangzhou Turbine Power 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

Despite Hangzhou Turbine Power Group's shares building up a head of steam, its P/E still lags most other companies. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Hangzhou Turbine Power Group maintains its low P/E on the weakness of its sliding earnings over the medium-term, 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 moving strongly in either direction in the near future under these circumstances.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Hangzhou Turbine Power Group 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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