Shandong Nanshan Fashion Sci-Tech Co., Ltd. (SZSE:300918) shares have had a horrible month, losing 26% after a relatively good period beforehand. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 42% share price drop.

Even after such a large drop in price, given about half the companies in China have price-to-earnings ratios (or "P/E's") above 28x, you may still consider Shandong Nanshan Fashion Sci-Tech as a highly attractive investment with its 13.6x P/E ratio. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

Shandong Nanshan Fashion Sci-Tech certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to degrade substantially, 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.

How Is Shandong Nanshan Fashion Sci-Tech's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as depressed as Shandong Nanshan Fashion Sci-Tech's is when the company's growth is on track to lag the market decidedly.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 7.3% last year. This was backed up an excellent period prior to see EPS up by 90% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to climb by 16% per annum during the coming three years according to the three analysts following the company. Meanwhile, the rest of the market is forecast to expand by 24% per annum, which is noticeably more attractive.

With this information, we can see why Shandong Nanshan Fashion Sci-Tech is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Bottom Line On Shandong Nanshan Fashion Sci-Tech's P/E

Shares in Shandong Nanshan Fashion Sci-Tech have plummeted and its P/E is now low enough to touch the ground. 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.

We've established that Shandong Nanshan Fashion Sci-Tech 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.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Shandong Nanshan Fashion Sci-Tech (at least 1 which makes us a bit uncomfortable), and understanding these should be part of your investment process.

You might be able to find a better investment than Shandong Nanshan Fashion Sci-Tech. 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.

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