With a price-to-earnings (or "P/E") ratio of 17.3x Nanjing Kangni Mechanical & Electrical Co.,Ltd (SHSE:603111) may be sending bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 32x and even P/E's higher than 57x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

With earnings growth that's exceedingly strong of late, Nanjing Kangni Mechanical & ElectricalLtd has been doing very well. One possibility is that the P/E is low because investors think this strong 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.

View our latest analysis for Nanjing Kangni Mechanical & ElectricalLtd

Is There Any Growth For Nanjing Kangni Mechanical & ElectricalLtd?

In order to justify its P/E ratio, Nanjing Kangni Mechanical & ElectricalLtd would need to produce sluggish growth that's trailing the market.

If we review the last year of earnings growth, the company posted a terrific increase of 37%. However, this wasn't enough as the latest three year period has seen a very unpleasant 61% drop in EPS in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

In contrast to the company, the rest of the market is expected to grow by 42% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

In light of this, it's understandable that Nanjing Kangni Mechanical & ElectricalLtd's P/E would sit below the majority of other companies. However, we think shrinking earnings are unlikely to lead to a stable P/E over the longer term, which could set up shareholders for future disappointment. Even just maintaining these prices could be difficult to achieve as recent earnings trends are already weighing down the shares.

The Bottom Line On Nanjing Kangni Mechanical & ElectricalLtd's P/E

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of Nanjing Kangni Mechanical & ElectricalLtd revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for Nanjing Kangni Mechanical & ElectricalLtd with six simple checks on some of these key factors.

If you're unsure about the strength of Nanjing Kangni Mechanical & ElectricalLtd'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.