Zhejiang Southeast Space Frame Co., Ltd. (SZSE:002135) shareholders that were waiting for something to happen have been dealt a blow with a 26% 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 40% in that time.
In spite of the heavy fall in price, it's still not a stretch to say that Zhejiang Southeast Space Frame's price-to-earnings (or "P/E") ratio of 25x right now seems quite "middle-of-the-road" compared to the market in China, where the median P/E ratio is around 24x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.
Zhejiang Southeast Space Frame has been struggling lately as its earnings have declined faster than most other companies. It might be that many expect the dismal earnings performance to revert back to market averages soon, which has kept the P/E from falling. You'd much rather the company wasn't bleeding earnings if you still believe in the business. Or at the very least, you'd be hoping it doesn't keep underperforming if your plan is to pick up some stock while it's not in favour.
Does Growth Match The P/E?
The only time you'd be comfortable seeing a P/E like Zhejiang Southeast Space Frame's is when the company's growth is tracking the market closely.
Retrospectively, the last year delivered a frustrating 48% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 51% in total over the last three years. 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 only analyst covering the company suggest earnings should grow by 100% over the next year. That's shaping up to be materially higher than the 42% growth forecast for the broader market.
In light of this, it's curious that Zhejiang Southeast Space Frame's P/E sits in line with the majority of other companies. It may be that most investors aren't convinced the company can achieve future growth expectations.
The Bottom Line On Zhejiang Southeast Space Frame's P/E
Following Zhejiang Southeast Space Frame's share price tumble, its P/E is now hanging on to the median market P/E. 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.
Our examination of Zhejiang Southeast Space Frame's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E as much as we would have predicted. There could be some unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.
You should always think about risks. Case in point, we've spotted 4 warning signs for Zhejiang Southeast Space Frame you should be aware of, and 2 of them are concerning.
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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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.
