GreenTech Environmental Co., Ltd. (SHSE:688466) shareholders that were waiting for something to happen have been dealt a blow with a 26% share price drop in the last month. Longer-term shareholders will rue the drop in the share price, since it's now virtually flat for the year after a promising few quarters.

Even after such a large drop in price, GreenTech Environmental's price-to-earnings (or "P/E") ratio of 16.4x might still 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 28x and even P/E's above 51x 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.

GreenTech Environmental certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. 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 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 GreenTech Environmental?

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

Retrospectively, the last year delivered an exceptional 61% gain to the company's bottom line. As a result, it also grew EPS by 16% in total over the last three years. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 38% during the coming year according to the sole analyst following the company. With the market predicted to deliver 42% growth , the company is positioned for a comparable earnings result.

With this information, we find it odd that GreenTech Environmental is trading at a P/E lower than the market. Apparently some shareholders are doubtful of the forecasts and have been accepting lower selling prices.

The Final Word

The softening of GreenTech Environmental's shares means its P/E is now sitting at a pretty low level. 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 GreenTech Environmental currently trades on a lower than expected P/E since its forecast growth is in line with the wider market. When we see an average earnings outlook with market-like growth, we assume potential risks are what might be placing pressure on the P/E ratio. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

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

Of course, you might also be able to find a better stock than GreenTech Environmental. 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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