Jiangnan Mould & Plastic Technology Co., Ltd.'s (SZSE:000700) price-to-earnings (or "P/E") ratio of 9.9x 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 27x and even P/E's above 50x are quite common. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

Jiangnan Mould & Plastic Technology has been doing a good job lately as it's been growing earnings at a solid pace. It might be that many expect the respectable 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.

How Is Jiangnan Mould & Plastic Technology's Growth Trending?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Jiangnan Mould & Plastic Technology's to be considered reasonable.

Retrospectively, the last year delivered a decent 12% gain to the company's bottom line. Pleasingly, EPS has also lifted 103% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 37% shows it's noticeably less attractive on an annualised basis.

In light of this, it's understandable that Jiangnan Mould & Plastic Technology's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.

The Final Word

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 Jiangnan Mould & Plastic Technology maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, 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. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.

Having said that, be aware Jiangnan Mould & Plastic Technology is showing 1 warning sign in our investment analysis, you should know about.

Of course, you might also be able to find a better stock than Jiangnan Mould & Plastic Technology. 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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