When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 37x, you may consider CSI Solar Co., Ltd. (SHSE:688472) as an attractive investment with its 23.4x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

CSI Solar has been struggling lately as its earnings have declined faster than most other companies. It seems that many are expecting the dismal earnings performance to persist, which has repressed the P/E. You'd much rather the company wasn't bleeding earnings if you still believe in the business. If not, then existing shareholders will probably struggle to get excited about the future direction of the share price.

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

In order to justify its P/E ratio, CSI Solar would need to produce sluggish growth that's trailing the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 53%. Even so, admirably EPS has lifted 4,696% 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 three years should generate growth of 45% each year as estimated by the seven analysts watching the company. With the market only predicted to deliver 21% each year, the company is positioned for a stronger earnings result.

With this information, we find it odd that CSI Solar is trading at a P/E lower than the market. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

What We Can Learn From CSI Solar's P/E?

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 CSI Solar 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.

It is also worth noting that we have found 4 warning signs for CSI Solar (1 is concerning!) that you need to take into consideration.

You might be able to find a better investment than CSI Solar. 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.