The Ningbo Shuanglin Auto Parts Co.,Ltd. (SZSE:300100) share price has done very well over the last month, posting an excellent gain of 35%. The last 30 days bring the annual gain to a very sharp 73%.

Even after such a large jump in price, given about half the companies in China have price-to-earnings ratios (or "P/E's") above 28x, you may still consider Ningbo Shuanglin Auto PartsLtd as an attractive investment with its 22.9x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Ningbo Shuanglin Auto PartsLtd certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. 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 Ningbo Shuanglin Auto PartsLtd's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 174% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 134% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 36% shows it's about the same on an annualised basis.

In light of this, it's peculiar that Ningbo Shuanglin Auto PartsLtd's P/E sits below the majority of other companies. It may be that most investors are not convinced the company can maintain recent growth rates.

The Final Word

Ningbo Shuanglin Auto PartsLtd's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Ningbo Shuanglin Auto PartsLtd currently trades on a lower than expected P/E since its recent three-year growth is in line with the wider market forecast. There could be some unobserved threats to earnings preventing the P/E ratio from matching the company's performance. At least the risk of a price drop looks to be subdued if recent medium-term earnings trends continue, but investors seem to think future earnings could see some volatility.

Plus, you should also learn about this 1 warning sign we've spotted with Ningbo Shuanglin Auto PartsLtd.

If these risks are making you reconsider your opinion on Ningbo Shuanglin Auto PartsLtd, explore our interactive list of high quality stocks to get an idea of what else is out there.

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