When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 27x, you may consider Fujian Funeng Co., Ltd. (SHSE:600483) as a highly attractive investment with its 9.1x 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.

Fujian Funeng 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 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.

What Are Growth Metrics Telling Us About The Low P/E?

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

If we review the last year of earnings growth, the company posted a terrific increase of 19%. EPS has also lifted 23% in aggregate from three years ago, mostly thanks to the last 12 months of growth. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 6.0% each year as estimated by the four analysts watching the company. With the market predicted to deliver 23% growth each year, the company is positioned for a weaker earnings result.

In light of this, it's understandable that Fujian Funeng'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 Fujian Funeng's P/E?

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 Fujian Funeng maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. 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.

You always need to take note of risks, for example - Fujian Funeng has 3 warning signs we think you should be aware of.

Of course, you might also be able to find a better stock than Fujian Funeng. 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.