When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 35x, you may consider Shanghai Aiko Solar Energy Co.,Ltd. (SHSE:600732) as a highly attractive investment with its 9.8x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Shanghai Aiko Solar EnergyLtd has been doing quite well of late. 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 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.

View our latest analysis for Shanghai Aiko Solar EnergyLtd

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

In order to justify its P/E ratio, Shanghai Aiko Solar EnergyLtd would need to produce anemic growth that's substantially trailing the market.

Retrospectively, the last year delivered an exceptional 256% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 870% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to climb by 8.5% during the coming year according to the six analysts following the company. With the market predicted to deliver 44% growth , the company is positioned for a weaker earnings result.

With this information, we can see why Shanghai Aiko Solar EnergyLtd is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Final Word

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Shanghai Aiko Solar EnergyLtd 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. It's hard to see the share price rising strongly in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 4 warning signs for Shanghai Aiko Solar EnergyLtd you should be aware of, and 1 of them can't be ignored.

If you're unsure about the strength of Shanghai Aiko Solar EnergyLtd'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.