The FULONGMA GROUP Co.,Ltd. (SHSE:603686) share price has fared very poorly over the last month, falling by a substantial 29%. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 29% share price drop.
Following the heavy fall in price, FULONGMA GROUPLtd may be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 12.7x, since almost half of all companies in China have P/E ratios greater than 27x and even P/E's higher than 48x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.
With its earnings growth in positive territory compared to the declining earnings of most other companies, FULONGMA GROUPLtd has been doing quite well of late. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
How Is FULONGMA GROUPLtd's Growth Trending?
There's an inherent assumption that a company should far underperform the market for P/E ratios like FULONGMA GROUPLtd's to be considered reasonable.
If we review the last year of earnings, the company posted a result that saw barely any deviation from a year ago. This isn't what shareholders were looking for as it means they've been left with a 41% decline in EPS over the last three years in total. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.
Shifting to the future, estimates from the lone analyst covering the company suggest earnings should grow by 23% over the next year. With the market predicted to deliver 41% growth , the company is positioned for a weaker earnings result.
With this information, we can see why FULONGMA GROUPLtd is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.
The Final Word
Shares in FULONGMA GROUPLtd have plummeted and its P/E is now low enough to touch the ground. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
We've established that FULONGMA GROUPLtd maintains its low P/E on the weakness of its forecast growth being lower than the wider market, 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. 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 1 warning sign for FULONGMA GROUPLtd that you need to take into consideration.
If you're unsure about the strength of FULONGMA GROUPLtd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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