Guangzhou Wondfo Biotech Co.,Ltd (SZSE:300482) shares have had a really impressive month, gaining 31% after a shaky period beforehand. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 4.6% over the last year.

In spite of the firm bounce in price, given about half the companies in China have price-to-earnings ratios (or "P/E's") above 33x, you may still consider Guangzhou Wondfo BiotechLtd as an attractive investment with its 26.9x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

Guangzhou Wondfo BiotechLtd's earnings growth of late has been pretty similar to most other companies. One possibility is that the P/E is low because investors think this modest earnings performance may begin to slide. If not, then existing shareholders have reason to be optimistic about the future direction of the share price.

Does Growth Match The Low P/E?

Guangzhou Wondfo BiotechLtd'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.

If we review the last year of earnings, the company posted a result that saw barely any deviation from a year ago. The lack of growth did nothing to help the company's aggregate three-year performance, which is an unsavory 32% drop in EPS. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the six analysts covering the company suggest earnings should grow by 22% per year over the next three years. That's shaping up to be materially lower than the 26% per annum growth forecast for the broader market.

In light of this, it's understandable that Guangzhou Wondfo BiotechLtd'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.

What We Can Learn From Guangzhou Wondfo BiotechLtd's P/E?

Despite Guangzhou Wondfo BiotechLtd'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.

We've established that Guangzhou Wondfo BiotechLtd 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.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Guangzhou Wondfo BiotechLtd that you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.