TianYu Eco-Environment Co., Ltd. (SHSE:603717) shares have had a horrible month, losing 28% after a relatively good period beforehand. Longer-term shareholders would now have taken a real hit with the stock declining 7.6% in the last year.

After such a large drop in price, given about half the companies in China have price-to-earnings ratios (or "P/E's") above 36x, you may consider TianYu Eco-Environment as a highly attractive investment with its -7.4x P/E ratio. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

For example, consider that TianYu Eco-Environment's financial performance has been poor lately as its earnings have been in decline. One possibility is that the P/E is low because investors think the company won't do enough to avoid underperforming the broader market in the near future. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

See our latest analysis for TianYu Eco-Environment

Does Growth Match The Low P/E?

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

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 43%. This has erased any of its gains during the last three years, with practically no change in EPS being achieved in total. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Comparing that to the market, which is predicted to deliver 45% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

With this information, we can see why TianYu Eco-Environment is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.

What We Can Learn From TianYu Eco-Environment's P/E?

Having almost fallen off a cliff, TianYu Eco-Environment's share price has pulled its P/E way down as well. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that TianYu Eco-Environment maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.

It is also worth noting that we have found 3 warning signs for TianYu Eco-Environment that you need to take into consideration.

If these risks are making you reconsider your opinion on TianYu Eco-Environment, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.