When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 30x, you may consider Square Technology Group Co.,Ltd (SHSE:603339) as a highly attractive investment with its 10x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.

Earnings have risen firmly for Square Technology GroupLtd 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.

See our latest analysis for Square Technology GroupLtd

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

There's an inherent assumption that a company should far underperform the market for P/E ratios like Square Technology GroupLtd's to be considered reasonable.

If we review the last year of earnings growth, the company posted a worthy increase of 13%. This was backed up an excellent period prior to see EPS up by 135% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Comparing that to the market, which is predicted to deliver 42% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

In light of this, it's understandable that Square Technology GroupLtd's P/E sits below the majority of other companies. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

The Key Takeaway

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.

As we suspected, our examination of Square Technology GroupLtd revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. 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 rising strongly in the near future under these circumstances.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Square Technology GroupLtd that you should be aware of.

Of course, you might also be able to find a better stock than Square Technology GroupLtd. 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.