EMTEK (Shenzhen) Co., Ltd. (SZSE:300938) shares have had a really impressive month, gaining 44% after a shaky period beforehand. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 9.6% over the last year.

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 34x, you may still consider EMTEK (Shenzhen) as an attractive investment with its 21.7x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Earnings have risen firmly for EMTEK (Shenzhen) recently, which is pleasing to see. One possibility is that the P/E is low because investors think this respectable earnings growth might actually underperform the broader market in the near future. 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 EMTEK (Shenzhen)?

There's an inherent assumption that a company should underperform the market for P/E ratios like EMTEK (Shenzhen)'s to be considered reasonable.

Retrospectively, the last year delivered an exceptional 22% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 112% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 37% shows it's noticeably less attractive on an annualised basis.

With this information, we can see why EMTEK (Shenzhen) is trading at a P/E lower than the market. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

The Key Takeaway

Despite EMTEK (Shenzhen)'s shares building up a head of steam, its P/E still lags most other companies. 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 EMTEK (Shenzhen) maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Plus, you should also learn about these 2 warning signs we've spotted with EMTEK (Shenzhen).

If these risks are making you reconsider your opinion on EMTEK (Shenzhen), explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.