Wuxi Lead Intelligent Equipment CO.,LTD. (SZSE:300450) shareholders would be excited to see that the share price has had a great month, posting a 65% gain and recovering from prior weakness. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 13% in the last twelve months.

Although its price has surged higher, you could still be forgiven for feeling indifferent about Wuxi Lead Intelligent EquipmentLTD's P/E ratio of 34.9x, since the median price-to-earnings (or "P/E") ratio in China is also close to 34x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

Recent times haven't been advantageous for Wuxi Lead Intelligent EquipmentLTD as its earnings have been falling quicker than most other companies. One possibility is that the P/E is moderate because investors think the company's earnings trend will eventually fall in line with most others in the market. You'd much rather the company wasn't bleeding earnings if you still believe in the business. Or at the very least, you'd be hoping it doesn't keep underperforming if your plan is to pick up some stock while it's not in favour.

How Is Wuxi Lead Intelligent EquipmentLTD's Growth Trending?

In order to justify its P/E ratio, Wuxi Lead Intelligent EquipmentLTD would need to produce growth that's similar to the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 62%. This means it has also seen a slide in earnings over the longer-term as EPS is down 8.6% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 39% per year as estimated by the analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 19% per year, which is noticeably less attractive.

With this information, we find it interesting that Wuxi Lead Intelligent EquipmentLTD is trading at a fairly similar P/E to the market. It may be that most investors aren't convinced the company can achieve future growth expectations.

The Key Takeaway

Its shares have lifted substantially and now Wuxi Lead Intelligent EquipmentLTD's P/E is also back up to the market median. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

Our examination of Wuxi Lead Intelligent EquipmentLTD's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E as much as we would have predicted. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing pressure on the P/E ratio. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

Don't forget that there may be other risks. For instance, we've identified 4 warning signs for Wuxi Lead Intelligent EquipmentLTD (2 are concerning) you should be aware of.

You might be able to find a better investment than Wuxi Lead Intelligent EquipmentLTD. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.