There wouldn't be many who think Atlantic China Welding Consumables, Inc.'s (SHSE:600558) price-to-earnings (or "P/E") ratio of 31.3x is worth a mention when the median P/E in China is similar at about 30x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

Atlantic China Welding Consumables 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 wane, which has kept the P/E from rising. 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 not quite in favour.

Does Growth Match The P/E?

In order to justify its P/E ratio, Atlantic China Welding Consumables would need to produce growth that's similar to the market.

If we review the last year of earnings growth, the company posted a terrific increase of 34%. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 12% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Comparing that to the market, which is predicted to deliver 36% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

In light of this, it's somewhat alarming that Atlantic China Welding Consumables' P/E sits in line with the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh on the share price eventually.

What We Can Learn From Atlantic China Welding Consumables' P/E?

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.

Our examination of Atlantic China Welding Consumables revealed its shrinking earnings over the medium-term aren't impacting its P/E as much as we would have predicted, given the market is set to grow. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.

Before you settle on your opinion, we've discovered 1 warning sign for Atlantic China Welding Consumables that you should be aware of.

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.