The Baotou Dongbao Bio-Tech Co.,Ltd (SZSE:300239) share price has fared very poorly over the last month, falling by a substantial 30%. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 40% in that time.

In spite of the heavy fall in price, Baotou Dongbao Bio-TechLtd's price-to-earnings (or "P/E") ratio of 22.5x 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 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.

The recent earnings growth at Baotou Dongbao Bio-TechLtd would have to be considered satisfactory if not spectacular. It might be that many expect the respectable earnings performance to degrade, which has repressed the P/E. 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 Baotou Dongbao Bio-TechLtd?

The only time you'd be truly comfortable seeing a P/E as low as Baotou Dongbao Bio-TechLtd's is when the company's growth is on track to lag the market.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 5.8% last year. Pleasingly, EPS has also lifted 422% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 41% shows it's noticeably more attractive on an annualised basis.

With this information, we find it odd that Baotou Dongbao Bio-TechLtd is trading at a P/E lower than the market. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

The Key Takeaway

Baotou Dongbao Bio-TechLtd's P/E has taken a tumble along with its share price. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of Baotou Dongbao Bio-TechLtd revealed its three-year earnings trends aren't contributing to its P/E anywhere near as much as we would have predicted, given they look better than current market expectations. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this positive performance. At least price risks look to be very low if recent medium-term earnings trends continue, but investors seem to think future earnings could see a lot of volatility.

A lot of potential risks can sit within a company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Baotou Dongbao Bio-TechLtd with six simple checks.

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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