Shanghai Mechanical & Electrical Industry Co.,Ltd. (SHSE:600835) shares have retraced a considerable 25% in the last month, reversing a fair amount of their solid recent performance. Still, a bad month hasn't completely ruined the past year with the stock gaining 38%, which is great even in a bull market.

Since its price has dipped substantially, Shanghai Mechanical & Electrical IndustryLtd's price-to-earnings (or "P/E") ratio of 17.6x might 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 33x and even P/E's above 64x are quite common. 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 Shanghai Mechanical & Electrical IndustryLtd 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. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. 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.

Does Growth Match The Low P/E?

Shanghai Mechanical & Electrical IndustryLtd's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

Retrospectively, the last year delivered a frustrating 12% 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 20% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Shifting to the future, estimates from the dual analysts covering the company suggest earnings should grow by 23% over the next year. That's shaping up to be materially lower than the 38% growth forecast for the broader market.

In light of this, it's understandable that Shanghai Mechanical & Electrical IndustryLtd's P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Bottom Line On Shanghai Mechanical & Electrical IndustryLtd's P/E

The softening of Shanghai Mechanical & Electrical IndustryLtd's shares means its P/E is now sitting at a pretty low level. 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 Shanghai Mechanical & Electrical IndustryLtd 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.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Shanghai Mechanical & Electrical IndustryLtd, and understanding them should be part of your investment process.

You might be able to find a better investment than Shanghai Mechanical & Electrical IndustryLtd. 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.