Ningbo Shimao Energy Co.,Ltd (SHSE:605028) shares have had a horrible month, losing 27% after a relatively good period beforehand. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 18% share price drop.

Although its price has dipped substantially, Ningbo Shimao EnergyLtd may still be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 11.4x, since almost half of all companies in China have P/E ratios greater than 28x and even P/E's higher than 50x are not unusual. 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.

Ningbo Shimao EnergyLtd has been doing a decent job lately as it's been growing earnings at a reasonable pace. It might be that many expect the respectable earnings performance to degrade, which has repressed the P/E. If that doesn't eventuate, then existing shareholders may have reason to be optimistic about the future direction of the share price.

Is There Any Growth For Ningbo Shimao EnergyLtd?

The only time you'd be truly comfortable seeing a P/E as depressed as Ningbo Shimao EnergyLtd's is when the company's growth is on track to lag the market decidedly.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 7.0% last year. This was backed up an excellent period prior to see EPS up by 77% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

This is in contrast to the rest of the market, which is expected to grow by 41% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's understandable that Ningbo Shimao EnergyLtd's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.

The Bottom Line On Ningbo Shimao EnergyLtd's P/E

Having almost fallen off a cliff, Ningbo Shimao EnergyLtd's share price has pulled its P/E way down as well. 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 Ningbo Shimao EnergyLtd revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Ningbo Shimao EnergyLtd, and understanding should be part of your investment process.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.