The Shenzhen Liande Automation Equipment co.,ltd. (SZSE:300545) share price has done very well over the last month, posting an excellent gain of 43%. Unfortunately, despite the strong performance over the last month, the full year gain of 8.5% isn't as attractive.

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 Shenzhen Liande Automation Equipmentltd as an attractive investment with its 28.3x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

With earnings growth that's exceedingly strong of late, Shenzhen Liande Automation Equipmentltd has been doing very well. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Is There Any Growth For Shenzhen Liande Automation Equipmentltd?

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

Retrospectively, the last year delivered an exceptional 68% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 268% 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 more attractive on an annualised basis.

In light of this, it's peculiar that Shenzhen Liande Automation Equipmentltd's P/E sits below the majority of other companies. It looks like most investors are not convinced the company can maintain its recent growth rates.

The Key Takeaway

Despite Shenzhen Liande Automation Equipmentltd's shares building up a head of steam, its P/E still lags most other companies. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Shenzhen Liande Automation Equipmentltd currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. It appears many are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

Plus, you should also learn about this 1 warning sign we've spotted with Shenzhen Liande Automation Equipmentltd.

If these risks are making you reconsider your opinion on Shenzhen Liande Automation Equipmentltd, 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.