Lacklustre Performance Is Driving Guangdong Dongfang Precision Science & Technology Co., Ltd.'s (SZSE:002611) 29% Price Drop

Guangdong Dongfang Precision Science & Technology Co., Ltd. (SZSE:002611) shares have retraced a considerable 29% in the last month, reversing a fair amount of their solid recent performance. Still, a bad month hasn't completely ruined the past year with the stock gaining 87%, which is great even in a bull market.

Although its price has dipped substantially, Guangdong Dongfang Precision Science & Technology may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 22.2x, since almost half of all companies in China have P/E ratios greater than 35x and even P/E's higher than 67x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

As an illustration, earnings have deteriorated at Guangdong Dongfang Precision Science & Technology over the last year, which is not ideal at all. It might be that many expect the disappointing earnings performance to continue or accelerate, which has repressed the P/E. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

Check out our latest analysis for Guangdong Dongfang Precision Science & Technology

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Guangdong Dongfang Precision Science & Technology's earnings, revenue and cash flow.

Does Growth Match The Low P/E?

In order to justify its P/E ratio, Guangdong Dongfang Precision Science & Technology would need to produce sluggish growth that's trailing the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 15%. Regardless, EPS has managed to lift by a handy 16% in aggregate from three years ago, thanks to the earlier period of growth. So we can start by confirming that the company has generally done a good job of growing earnings over that time, even though it had some hiccups along the way.

This is in contrast to the rest of the market, which is expected to grow by 38% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we can see why Guangdong Dongfang Precision Science & Technology is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.

What We Can Learn From Guangdong Dongfang Precision Science & Technology's P/E?

The softening of Guangdong Dongfang Precision Science & Technology's shares means its P/E is now sitting at a pretty low level. 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 Guangdong Dongfang Precision Science & Technology 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. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Guangdong Dongfang Precision Science & Technology that you need to be mindful of.

If you're unsure about the strength of Guangdong Dongfang Precision Science & Technology'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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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.