Those holding Touchstone International Medical Science Co., Ltd. (SHSE:688013) shares would be relieved that the share price has rebounded 25% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 23% over that time.

In spite of the firm bounce in price, Touchstone International Medical Science's price-to-earnings (or "P/E") ratio of 27.4x 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 32x and even P/E's above 58x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

The earnings growth achieved at Touchstone International Medical Science over the last year would be more than acceptable for most companies. One possibility is that the P/E is low because investors think this respectable earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be optimistic about the future direction of the share price.

What Are Growth Metrics Telling Us About The Low P/E?

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

Retrospectively, the last year delivered an exceptional 20% gain to the company's bottom line. As a result, it also grew EPS by 23% in total over the last three years. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Comparing that to the market, which is predicted to deliver 40% 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 Touchstone International Medical Science 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 Touchstone International Medical Science's P/E

Despite Touchstone International Medical Science's shares building up a head of steam, its P/E still lags most other companies. 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 Touchstone International Medical Science 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. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Touchstone International Medical Science that you should be aware of.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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