The Motic (Xiamen) Electric Group Co.,Ltd (SZSE:300341) share price has fared very poorly over the last month, falling by a substantial 26%. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 10% share price drop.

Even after such a large drop in price, Motic (Xiamen) Electric GroupLtd's price-to-earnings (or "P/E") ratio of 22.7x might still 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 30x and even P/E's above 54x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

For instance, Motic (Xiamen) Electric GroupLtd's receding earnings in recent times would have to be some food for thought. 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.

Check out our latest analysis for Motic (Xiamen) Electric GroupLtd

How Is Motic (Xiamen) Electric GroupLtd's Growth Trending?

There's an inherent assumption that a company should underperform the market for P/E ratios like Motic (Xiamen) Electric GroupLtd's to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 18%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 43% in total over the last three years. 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.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 42% shows it's noticeably less attractive on an annualised basis.

With this information, we can see why Motic (Xiamen) Electric GroupLtd 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.

The Bottom Line On Motic (Xiamen) Electric GroupLtd's P/E

Motic (Xiamen) Electric GroupLtd's P/E has taken a tumble along with its share price. 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 Motic (Xiamen) Electric GroupLtd maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, as expected. 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 rising strongly in the near future under these circumstances.

You always need to take note of risks, for example - Motic (Xiamen) Electric GroupLtd has 1 warning sign we think you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.