Shanghai Taisheng Wind Power Equipment Co., Ltd. (SZSE:300129) shareholders would be excited to see that the share price has had a great month, posting a 43% gain and recovering from prior weakness. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 11% over that time.

Although its price has surged higher, Shanghai Taisheng Wind Power Equipment's price-to-earnings (or "P/E") ratio of 28.1x might still make it look like a buy right now compared to the market in China, where around half of the companies have P/E ratios above 34x and even P/E's above 67x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Recent times have been pleasing for Shanghai Taisheng Wind Power Equipment as its earnings have risen in spite of the market's earnings going into reverse. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. 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.

Does Growth Match The Low P/E?

In order to justify its P/E ratio, Shanghai Taisheng Wind Power Equipment would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered a decent 3.7% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen an unpleasant 43% overall drop in EPS. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 43% per annum as estimated by the seven analysts watching the company. With the market only predicted to deliver 18% per year, the company is positioned for a stronger earnings result.

In light of this, it's peculiar that Shanghai Taisheng Wind Power Equipment's P/E sits below the majority of other companies. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

The Bottom Line On Shanghai Taisheng Wind Power Equipment's P/E

Despite Shanghai Taisheng Wind Power Equipment's shares building up a head of steam, its P/E still lags most other companies. 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.

Our examination of Shanghai Taisheng Wind Power Equipment's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E anywhere near as much as we would have predicted. There could be some major unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Shanghai Taisheng Wind Power Equipment, and understanding should be part of your investment process.

You might be able to find a better investment than Shanghai Taisheng Wind Power Equipment. 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.