Xiamen Xiangyu Co., Ltd. (SHSE:600057) shareholders that were waiting for something to happen have been dealt a blow with a 27% share price drop in the last month. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 40% share price drop.

After such a large drop in price, Xiamen Xiangyu's price-to-earnings (or "P/E") ratio of 7.9x 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 28x and even P/E's above 53x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

While the market has experienced earnings growth lately, Xiamen Xiangyu's earnings have gone into reverse gear, which is not great. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If you still 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?

The only time you'd be truly comfortable seeing a P/E as depressed as Xiamen Xiangyu's is when the company's growth is on track to lag the market decidedly.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 51%. That put a dampener on the good run it was having over the longer-term as its three-year EPS growth is still a noteworthy 11% in total. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 34% per year as estimated by the two analysts watching the company. That's shaping up to be materially higher than the 24% per year growth forecast for the broader market.

With this information, we find it odd that Xiamen Xiangyu is trading at a P/E lower than the market. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

The Bottom Line On Xiamen Xiangyu's P/E

Shares in Xiamen Xiangyu 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 Xiamen Xiangyu currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. It appears many are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

And what about other risks? Every company has them, and we've spotted 4 warning signs for Xiamen Xiangyu you should know about.

Of course, you might also be able to find a better stock than Xiamen Xiangyu. 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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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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