Despite an already strong run, Chongqing Changan Automobile Company Limited (SZSE:000625) shares have been powering on, with a gain of 36% in the last thirty days. The last 30 days bring the annual gain to a very sharp 76%.

In spite of the firm bounce in price, Chongqing Changan Automobile's price-to-earnings (or "P/E") ratio of 19.8x 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 36x and even P/E's above 67x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Chongqing Changan Automobile certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for Chongqing Changan Automobile

Is There Any Growth For Chongqing Changan Automobile?

There's an inherent assumption that a company should underperform the market for P/E ratios like Chongqing Changan Automobile's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 44% last year. The strong recent performance means it was also able to grow EPS by 169% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Shifting to the future, estimates from the analysts covering the company suggest earnings growth is heading into negative territory, declining 16% over the next year. With the market predicted to deliver 44% growth , that's a disappointing outcome.

In light of this, it's understandable that Chongqing Changan Automobile's P/E would sit below the majority of other companies. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Bottom Line On Chongqing Changan Automobile's P/E

Chongqing Changan Automobile's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. 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.

As we suspected, our examination of Chongqing Changan Automobile's analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. 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 Chongqing Changan Automobile (of which 1 shouldn't be ignored!) you should know about.

If these risks are making you reconsider your opinion on Chongqing Changan Automobile, 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.