Jiangsu Fengshan Group Co.,Ltd (SHSE:603810) shares have had a really impressive month, gaining 30% after a shaky period beforehand. But not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 20% in the last twelve months.

Although its price has surged higher, given close to half the companies in China have price-to-earnings ratios (or "P/E's") above 31x, you may still consider Jiangsu Fengshan GroupLtd as an attractive investment with its 21.6x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

For example, consider that Jiangsu Fengshan GroupLtd's financial performance has been poor lately as it's 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.

View our latest analysis for Jiangsu Fengshan GroupLtd

Does Growth Match The Low P/E?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 52%. The last three years don't look nice either as the company has shrunk EPS by 35% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Comparing that to the market, which is predicted to deliver 34% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

With this information, we are not surprised that Jiangsu Fengshan GroupLtd is trading at a P/E lower than the market. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as recent earnings trends are already weighing down the shares.

The Final Word

Jiangsu Fengshan GroupLtd's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. 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 Fengshan GroupLtd 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. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

You should always think about risks. Case in point, we've spotted 3 warning signs for Jiangsu Fengshan GroupLtd you should be aware of, and 1 of them is concerning.

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 P/E below 20x.

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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.