When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 34x, you may consider Gansu Energy Chemical Co., Ltd. (SZSE:000552) as a highly attractive investment with its 12x P/E ratio. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

Gansu Energy Chemical has been struggling lately as its earnings have declined faster 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.

How Is Gansu Energy Chemical's Growth Trending?

Gansu Energy Chemical's P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.

Retrospectively, the last year delivered a frustrating 53% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 6.1% 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 year should generate growth of 36% as estimated by the dual analysts watching the company. With the market predicted to deliver 42% growth , the company is positioned for a weaker earnings result.

In light of this, it's understandable that Gansu Energy Chemical's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Key Takeaway

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.

We've established that Gansu Energy Chemical maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

There are also other vital risk factors to consider and we've discovered 4 warning signs for Gansu Energy Chemical (1 shouldn't be ignored!) that you should be aware of before investing here.

You might be able to find a better investment than Gansu Energy Chemical. 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.