With a price-to-earnings (or "P/E") ratio of 16.1x Xiamen Voke Mold & Plastic Engineering Co., Ltd. (SZSE:301196) may be sending bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 27x and even P/E's higher than 52x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

Xiamen Voke Mold & Plastic Engineering certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

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

There's an inherent assumption that a company should underperform the market for P/E ratios like Xiamen Voke Mold & Plastic Engineering's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 51% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 15% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Comparing that to the market, which is predicted to deliver 38% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

With this information, we are not surprised that Xiamen Voke Mold & Plastic Engineering is trading at a P/E lower than the market. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Key Takeaway

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Xiamen Voke Mold & Plastic Engineering revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Xiamen Voke Mold & Plastic Engineering (of which 1 is a bit unpleasant!) you should know about.

Of course, you might also be able to find a better stock than Xiamen Voke Mold & Plastic Engineering. 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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