The Friend Co.,Ltd. (SHSE:605050) share price has fared very poorly over the last month, falling by a substantial 27%. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 36% in that time.

After such a large drop in price, FriendLtd's price-to-earnings (or "P/E") ratio of 11.3x might make it look like a strong buy right now compared to the market in China, where around half of the companies have P/E ratios above 27x and even P/E's above 48x are quite common. 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.

FriendLtd 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 degrade substantially, possibly more than the market, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Does Growth Match The Low P/E?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 17% last year. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Turning to the outlook, the next year should generate growth of 25% as estimated by the lone analyst watching the company. That's shaping up to be materially lower than the 41% growth forecast for the broader market.

In light of this, it's understandable that FriendLtd'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.

What We Can Learn From FriendLtd's P/E?

Shares in FriendLtd have plummeted and its P/E is now low enough to touch the ground. 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 FriendLtd's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

Having said that, be aware FriendLtd is showing 2 warning signs in our investment analysis, and 1 of those is a bit concerning.

You might be able to find a better investment than FriendLtd. 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.