China Automotive Engineering Research Institute Co., Ltd.'s (SHSE:601965) price-to-earnings (or "P/E") ratio of 26.8x might 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 34x and even P/E's above 62x 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.

Recent times have been pleasing for China Automotive Engineering Research Institute as its earnings have risen in spite of the market's earnings going into reverse. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for China Automotive Engineering Research Institute

Is There Any Growth For China Automotive Engineering Research Institute?

In order to justify its P/E ratio, China Automotive Engineering Research Institute would need to produce sluggish growth that's trailing the market.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 12% last year. Pleasingly, EPS has also lifted 43% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 15% during the coming year according to the dual analysts following the company. With the market predicted to deliver 43% growth , the company is positioned for a weaker earnings result.

With this information, we can see why China Automotive Engineering Research Institute 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.

What We Can Learn From China Automotive Engineering Research Institute's P/E?

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that China Automotive Engineering Research Institute 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.

Before you settle on your opinion, we've discovered 1 warning sign for China Automotive Engineering Research Institute that you should be aware of.

If you're unsure about the strength of China Automotive Engineering Research Institute'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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