Jiangsu Etern Company Limited (SHSE:600105) shareholders that were waiting for something to happen have been dealt a blow with a 27% share price drop in the last month. The last month has meant the stock is now only up 4.0% during the last year.

In spite of the heavy fall in price, it's still not a stretch to say that Jiangsu Etern's price-to-earnings (or "P/E") ratio of 25.3x right now seems quite "middle-of-the-road" compared to the market in China, where the median P/E ratio is around 28x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

Jiangsu Etern 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. It might be that many expect the strong earnings performance to deteriorate like the rest, which has kept the P/E from rising. 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 not quite in favour.

How Is Jiangsu Etern's Growth Trending?

There's an inherent assumption that a company should be matching the market for P/E ratios like Jiangsu Etern's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 264% gain to the company's bottom line. Still, EPS has barely risen at all from three years ago in total, which is not ideal. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Looking ahead now, EPS is anticipated to slump, contracting by 47% during the coming year according to the lone analyst following the company. With the market predicted to deliver 42% growth , that's a disappointing outcome.

With this information, we find it concerning that Jiangsu Etern is trading at a fairly similar P/E to the market. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as these declining earnings are likely to weigh on the share price eventually.

The Final Word

With its share price falling into a hole, the P/E for Jiangsu Etern looks quite average now. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of Jiangsu Etern's analyst forecasts revealed that its outlook for shrinking earnings isn't impacting its P/E as much as we would have predicted. When we see a poor outlook with earnings heading backwards, we suspect share price is at risk of declining, sending the moderate P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

You need to take note of risks, for example - Jiangsu Etern has 2 warning signs (and 1 which is potentially serious) we think you should know about.

You might be able to find a better investment than Jiangsu Etern. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.