To the annoyance of some shareholders, Jiangsu Canopus Wisdom Medical Technology Co.,Ltd. (SZSE:301290) shares are down a considerable 26% in the last month, which continues a horrid run for the company. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 50% share price drop.

Even after such a large drop in price, given about half the companies in China have price-to-earnings ratios (or "P/E's") above 28x, you may still consider Jiangsu Canopus Wisdom Medical TechnologyLtd as an attractive investment with its 21.4x 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.

As an illustration, earnings have deteriorated at Jiangsu Canopus Wisdom Medical TechnologyLtd over the last year, which is not ideal at all. It might be that many expect the disappointing earnings performance to continue or accelerate, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Does Growth Match The Low P/E?

The only time you'd be truly comfortable seeing a P/E as low as Jiangsu Canopus Wisdom Medical TechnologyLtd's is when the company's growth is on track to lag the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 26%. As a result, earnings from three years ago have also fallen 2.0% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

In contrast to the company, the rest of the market is expected to grow by 42% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

In light of this, it's understandable that Jiangsu Canopus Wisdom Medical TechnologyLtd's P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Final Word

Jiangsu Canopus Wisdom Medical TechnologyLtd's recently weak share price has pulled its P/E below most other companies. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Jiangsu Canopus Wisdom Medical TechnologyLtd revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

Plus, you should also learn about these 2 warning signs we've spotted with Jiangsu Canopus Wisdom Medical TechnologyLtd.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on 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.