Risks Still Elevated At These Prices As Wuxi Smart Auto-Control Engineering Co., Ltd. (SZSE:002877) Shares Dive 27%

Wuxi Smart Auto-Control Engineering Co., Ltd. (SZSE:002877) shares have retraced a considerable 27% in the last month, reversing a fair amount of their solid recent performance. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 26% in that time.

Although its price has dipped substantially, Wuxi Smart Auto-Control Engineering may still be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 47.7x, since almost half of all companies in China have P/E ratios under 32x and even P/E's lower than 19x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

For example, consider that Wuxi Smart Auto-Control Engineering's financial performance has been poor lately as its earnings have been in decline. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.

Check out our latest analysis for Wuxi Smart Auto-Control Engineering

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Wuxi Smart Auto-Control Engineering will help you shine a light on its historical performance.

Is There Enough Growth For Wuxi Smart Auto-Control Engineering?

In order to justify its P/E ratio, Wuxi Smart Auto-Control Engineering would need to produce impressive growth in excess of the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 49%. The last three years don't look nice either as the company has shrunk EPS by 7.5% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

In contrast to the company, the rest of the market is expected to grow by 38% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

With this information, we find it concerning that Wuxi Smart Auto-Control Engineering is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

The Key Takeaway

Wuxi Smart Auto-Control Engineering's P/E hasn't come down all the way after its stock plunged. 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.

We've established that Wuxi Smart Auto-Control Engineering currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You need to take note of risks, for example - Wuxi Smart Auto-Control Engineering has 2 warning signs (and 1 which is concerning) we think you should know about.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.