The Shanghai Menon Animal Nutrition Technology Co., Ltd. (SZSE:301156) share price has fared very poorly over the last month, falling by a substantial 25%. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 14% share price drop.

In spite of the heavy fall in price, given about half the companies in China have price-to-earnings ratios (or "P/E's") above 28x, you may still consider Shanghai Menon Animal Nutrition Technology as an attractive investment with its 24.6x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

For example, consider that Shanghai Menon Animal Nutrition Technology's financial performance has been pretty ordinary lately as earnings growth is non-existent. One possibility is that the P/E is low because investors think this benign earnings growth rate will likely 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.

Is There Any Growth For Shanghai Menon Animal Nutrition Technology?

The only time you'd be truly comfortable seeing a P/E as low as Shanghai Menon Animal Nutrition Technology's is when the company's growth is on track to lag the market.

Taking a look back first, we see that there was hardly any earnings per share growth to speak of for the company over the past year. This isn't what shareholders were looking for as it means they've been left with a 12% decline in EPS over the last three years in total. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 42% shows it's an unpleasant look.

In light of this, it's understandable that Shanghai Menon Animal Nutrition Technology's P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. 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 Shanghai Menon Animal Nutrition Technology's P/E

Shanghai Menon Animal Nutrition Technology's P/E has taken a tumble along with its share price. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

As we suspected, our examination of Shanghai Menon Animal Nutrition Technology revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Shanghai Menon Animal Nutrition Technology, and understanding them should be part of your investment process.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.