Why Investors Shouldn't Be Surprised By Shandong Gold Phoenix Co.,Ltd's (SHSE:603586) 30% Share Price Plunge

Shandong Gold Phoenix Co.,Ltd (SHSE:603586) shares have had a horrible month, losing 30% after a relatively good period beforehand. Longer-term shareholders would now have taken a real hit with the stock declining 9.4% in the last year.

After such a large drop in price, Shandong Gold PhoenixLtd may be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 16.7x, since almost half of all companies in China have P/E ratios greater than 30x and even P/E's higher than 53x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

With earnings growth that's exceedingly strong of late, Shandong Gold PhoenixLtd has been doing very well. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for Shandong Gold PhoenixLtd

Although there are no analyst estimates available for Shandong Gold PhoenixLtd, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Does Growth Match The Low P/E?

Shandong Gold PhoenixLtd's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

Retrospectively, the last year delivered an exceptional 46% gain to the company's bottom line. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Comparing that to the market, which is predicted to deliver 41% 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 Shandong Gold PhoenixLtd is trading at a P/E lower than the market. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

The Final Word

The softening of Shandong Gold PhoenixLtd's shares means its P/E is now sitting at a pretty low level. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Shandong Gold PhoenixLtd revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. 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.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Shandong Gold PhoenixLtd (of which 1 is significant!) you should know about.

If these risks are making you reconsider your opinion on Shandong Gold PhoenixLtd, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.