Dalian BIO-CHEM Company Limited (SHSE:603360) shares have continued their recent momentum with a 35% gain in the last month alone. The last month tops off a massive increase of 126% in 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 32x, you may still consider Dalian BIO-CHEM as an attractive investment with its 27.7x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Recent times haven't been advantageous for Dalian BIO-CHEM as its earnings have been falling quicker than most other companies. The P/E is probably low because investors think this poor earnings performance isn't going to improve at all. 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 the earnings slide doesn't get any worse if your plan is to pick up some stock while it's out of favour.

What Are Growth Metrics Telling Us About The Low P/E?

The only time you'd be truly comfortable seeing a P/E as low as Dalian BIO-CHEM's is when the company's growth is on track to lag 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 16%. Even so, admirably EPS has lifted 45% in aggregate from three years ago, notwithstanding the last 12 months. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Turning to the outlook, the next year should generate growth of 47% as estimated by the only analyst watching the company. With the market only predicted to deliver 37%, the company is positioned for a stronger earnings result.

With this information, we find it odd that Dalian BIO-CHEM is trading at a P/E lower than the market. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

The Final Word

Dalian BIO-CHEM's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Dalian BIO-CHEM currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.

Before you settle on your opinion, we've discovered 1 warning sign for Dalian BIO-CHEM that you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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