ShenZhen Woer Heat-Shrinkable Material Co.,Ltd. (SZSE:002130) shareholders that were waiting for something to happen have been dealt a blow with a 25% share price drop in the last month. Looking at the bigger picture, even after this poor month the stock is up 56% in the last year.

Although its price has dipped substantially, ShenZhen Woer Heat-Shrinkable MaterialLtd may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 16.4x, since almost half of all companies in China have P/E ratios greater than 27x and even P/E's higher than 50x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Recent times have been pleasing for ShenZhen Woer Heat-Shrinkable MaterialLtd as its earnings have risen in spite of the market's earnings going into reverse. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. 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.

Is There Any Growth For ShenZhen Woer Heat-Shrinkable MaterialLtd?

In order to justify its P/E ratio, ShenZhen Woer Heat-Shrinkable MaterialLtd would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered an exceptional 35% gain to the company's bottom line. Pleasingly, EPS has also lifted 48% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 27% per annum during the coming three years according to the one analyst following the company. With the market only predicted to deliver 19% per annum, the company is positioned for a stronger earnings result.

With this information, we find it odd that ShenZhen Woer Heat-Shrinkable MaterialLtd 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.

What We Can Learn From ShenZhen Woer Heat-Shrinkable MaterialLtd's P/E?

The softening of ShenZhen Woer Heat-Shrinkable MaterialLtd's shares means its P/E is now sitting at a pretty low level. 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 ShenZhen Woer Heat-Shrinkable MaterialLtd currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. There could be some major unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. It appears many are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with ShenZhen Woer Heat-Shrinkable MaterialLtd (at least 1 which is significant), and understanding them should be part of your investment process.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.