Positive Sentiment Still Eludes Elegant Home-Tech Co., Ltd. (SHSE:603221) Following 25% Share Price Slump

Elegant Home-Tech Co., Ltd. (SHSE:603221) shares have had a horrible month, losing 25% after a relatively good period beforehand. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 20% share price drop.

Even after such a large drop in price, Elegant Home-Tech's price-to-earnings (or "P/E") ratio of 14.9x might still make it look like a strong buy right now compared to the market in China, where around half of the companies have P/E ratios above 33x and even P/E's above 63x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.

Recent times have been quite advantageous for Elegant Home-Tech as its earnings have been rising very briskly. 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 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 out of favour.

Check out our latest analysis for Elegant Home-Tech

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Elegant Home-Tech will help you shine a light on its historical performance.

Does Growth Match The Low P/E?

The only time you'd be truly comfortable seeing a P/E as depressed as Elegant Home-Tech's is when the company's growth is on track to lag the market decidedly.

If we review the last year of earnings growth, the company posted a terrific increase of 474%. The strong recent performance means it was also able to grow EPS by 465% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

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

In light of this, it's peculiar that Elegant Home-Tech's P/E sits below the majority of other companies. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

The Bottom Line On Elegant Home-Tech's P/E

Having almost fallen off a cliff, Elegant Home-Tech's share price has pulled its P/E way down as well. 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.

We've established that Elegant Home-Tech currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. At least price risks look to be very low if recent medium-term earnings trends continue, but investors seem to think future earnings could see a lot of volatility.

There are also other vital risk factors to consider and we've discovered 2 warning signs for Elegant Home-Tech (1 is a bit concerning!) that you should be aware of before investing here.

You might be able to find a better investment than Elegant Home-Tech. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.