Poly Plastic Masterbatch (SuZhou) Co.,Ltd (SZSE:300905) shareholders that were waiting for something to happen have been dealt a blow with a 27% share price drop in the last month. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 12% in that time.

Even after such a large drop in price, you could still be forgiven for feeling indifferent about Poly Plastic Masterbatch (SuZhou)Ltd's P/E ratio of 30x, since the median price-to-earnings (or "P/E") ratio in China is also close to 30x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

Earnings have risen firmly for Poly Plastic Masterbatch (SuZhou)Ltd recently, which is pleasing to see. One possibility is that the P/E is moderate because investors think this respectable earnings growth might not be enough to outperform the broader market in the near future. 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 not quite in favour.

View our latest analysis for Poly Plastic Masterbatch (SuZhou)Ltd

Does Growth Match The P/E?

The only time you'd be comfortable seeing a P/E like Poly Plastic Masterbatch (SuZhou)Ltd's is when the company's growth is tracking the market closely.

Retrospectively, the last year delivered an exceptional 30% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen a very unpleasant 50% drop in EPS in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 42% shows it's an unpleasant look.

In light of this, it's somewhat alarming that Poly Plastic Masterbatch (SuZhou)Ltd's P/E sits in line with the majority of other companies. Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh on the share price eventually.

The Final Word

Following Poly Plastic Masterbatch (SuZhou)Ltd's share price tumble, its P/E is now hanging on to the median market P/E. 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.

Our examination of Poly Plastic Masterbatch (SuZhou)Ltd revealed its shrinking earnings over the medium-term aren't impacting its P/E as much as we would have predicted, given the market is set to grow. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.

Having said that, be aware Poly Plastic Masterbatch (SuZhou)Ltd is showing 4 warning signs in our investment analysis, and 1 of those is significant.

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.

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