Those holding Eaglerise Electric & Electronic (China) Co., Ltd (SZSE:002922) shares would be relieved that the share price has rebounded 35% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 20% in the last twelve months.

In spite of the firm bounce in price, Eaglerise Electric & Electronic (China)'s price-to-earnings (or "P/E") ratio of 26.1x 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 30x and even P/E's above 55x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Eaglerise Electric & Electronic (China) 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 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.

Does Growth Match The Low P/E?

In order to justify its P/E ratio, Eaglerise Electric & Electronic (China) 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 32% last year. The strong recent performance means it was also able to grow EPS by 134% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the one analyst covering the company suggest earnings should grow by 13% over the next year. 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 Eaglerise Electric & Electronic (China)'s P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Final Word

The latest share price surge wasn't enough to lift Eaglerise Electric & Electronic (China)'s P/E close to the market median. 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.

We've established that Eaglerise Electric & Electronic (China) 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. It's hard to see the share price rising strongly in the near future under these circumstances.

There are also other vital risk factors to consider and we've discovered 3 warning signs for Eaglerise Electric & Electronic (China) (1 is a bit concerning!) that you should be aware of before investing here.

You might be able to find a better investment than Eaglerise Electric & Electronic (China). 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.