When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 30x, you may consider Intco Recycling Resources Co., Ltd. (SHSE:688087) as an attractive investment with its 21.4x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Intco Recycling Resources certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. 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.

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 Intco Recycling Resources' to be considered reasonable.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 14% last year. However, this wasn't enough as the latest three year period has seen an unpleasant 20% overall drop in EPS. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 15% per year as estimated by the three analysts watching the company. That's shaping up to be materially lower than the 19% per annum growth forecast for the broader market.

With this information, we can see why Intco Recycling Resources is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Final Word

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 Intco Recycling Resources' analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. 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.

Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for Intco Recycling Resources with six simple checks on some of these key factors.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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