The Guanglian Aviation Industry Co., Ltd. (SZSE:300900) share price has fared very poorly over the last month, falling by a substantial 30%. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 50% loss during that time.

Since its price has dipped substantially, Guanglian Aviation Industry's price-to-earnings (or "P/E") ratio of 21.6x might 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 50x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Guanglian Aviation Industry 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 not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Is There Any Growth For Guanglian Aviation Industry?

In order to justify its P/E ratio, Guanglian Aviation Industry would need to produce sluggish growth that's trailing the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 133% last year. Pleasingly, EPS has also lifted 48% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 33% during the coming year according to the four analysts following the company. With the market predicted to deliver 41% growth , the company is positioned for a weaker earnings result.

In light of this, it's understandable that Guanglian Aviation Industry's P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Bottom Line On Guanglian Aviation Industry's P/E

Guanglian Aviation Industry's P/E has taken a tumble along with its share price. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Guanglian Aviation Industry maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Having said that, be aware Guanglian Aviation Industry is showing 3 warning signs in our investment analysis, and 2 of those can't be ignored.

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.