Guodian Nanjing Automation Co., Ltd. (SHSE:600268) shareholders that were waiting for something to happen have been dealt a blow with a 27% share price drop in the last month. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 26% in that time.

After such a large drop in price, given about half the companies in China have price-to-earnings ratios (or "P/E's") above 27x, you may consider Guodian Nanjing Automation as an attractive investment with its 22.5x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

The earnings growth achieved at Guodian Nanjing Automation over the last year would be more than acceptable for most companies. One possibility is that the P/E is low because investors think this respectable earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be optimistic about the future direction of the share price.

How Is Guodian Nanjing Automation's Growth Trending?

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

Retrospectively, the last year delivered an exceptional 27% gain to the company's bottom line. Pleasingly, EPS has also lifted 197% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

It's interesting to note that the rest of the market is similarly expected to grow by 41% over the next year, which is fairly even with the company's recent medium-term annualised growth rates.

With this information, we find it odd that Guodian Nanjing Automation is trading at a P/E lower than the market. It may be that most investors are not convinced the company can maintain recent growth rates.

The Bottom Line On Guodian Nanjing Automation's P/E

Guodian Nanjing Automation's P/E has taken a tumble along with its share price. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

Our examination of Guodian Nanjing Automation revealed its three-year earnings trends aren't contributing to its P/E as much as we would have predicted, given they look similar to current market expectations. There could be some unobserved threats to earnings preventing the P/E ratio from matching the company's performance. At least the risk of a price drop looks to be subdued if recent medium-term earnings trends continue, but investors seem to think future earnings could see some volatility.

It is also worth noting that we have found 1 warning sign for Guodian Nanjing Automation that you need to take into consideration.

Of course, you might also be able to find a better stock than Guodian Nanjing Automation. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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