With a price-to-earnings (or "P/E") ratio of 15.6x Jiangsu Kanion Pharmaceutical Co.,Ltd. (SHSE:600557) may be sending very bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 36x and even P/E's higher than 70x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.

Recent times have been pleasing for Jiangsu Kanion PharmaceuticalLtd 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 not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Does Growth Match The Low P/E?

The only time you'd be truly comfortable seeing a P/E as depressed as Jiangsu Kanion PharmaceuticalLtd's is when the company's growth is on track to lag the market decidedly.

Retrospectively, the last year delivered a decent 8.1% gain to the company's bottom line. This was backed up an excellent period prior to see EPS up by 104% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 21% during the coming year according to the nine analysts following the company. With the market predicted to deliver 40% growth , the company is positioned for a weaker earnings result.

In light of this, it's understandable that Jiangsu Kanion PharmaceuticalLtd'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.

As we suspected, our examination of Jiangsu Kanion PharmaceuticalLtd's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Before you take the next step, you should know about the 2 warning signs for Jiangsu Kanion PharmaceuticalLtd that we have uncovered.

Of course, you might also be able to find a better stock than Jiangsu Kanion PharmaceuticalLtd. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.