Investors Give Shanghai Ganglian E-Commerce Holdings Co., Ltd. (SZSE:300226) Shares A 26% Hiding

Shanghai Ganglian E-Commerce Holdings Co., Ltd. (SZSE:300226) shareholders won't be pleased to see that the share price has had a very rough month, dropping 26% and undoing the prior period's positive performance. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 55% loss during that time.

Since its price has dipped substantially, Shanghai Ganglian E-Commerce Holdings' price-to-earnings (or "P/E") ratio of 25.1x might make it look like a buy right now compared to the market in China, where around half of the companies have P/E ratios above 30x and even P/E's above 53x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Shanghai Ganglian E-Commerce Holdings certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

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Does Growth Match The Low P/E?

In order to justify its P/E ratio, Shanghai Ganglian E-Commerce Holdings would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered an exceptional 19% gain to the company's bottom line. As a result, it also grew EPS by 11% in total over the last three years. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Shifting to the future, estimates from the five analysts covering the company suggest earnings should grow by 20% per year over the next three years. That's shaping up to be similar to the 21% each year growth forecast for the broader market.

With this information, we find it odd that Shanghai Ganglian E-Commerce Holdings is trading at a P/E lower than the market. It may be that most investors are not convinced the company can achieve future growth expectations.

The Final Word

The softening of Shanghai Ganglian E-Commerce Holdings' 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.

We've established that Shanghai Ganglian E-Commerce Holdings currently trades on a lower than expected P/E since its forecast growth is in line with the wider market. There could be some unobserved threats to earnings preventing the P/E ratio from matching the outlook. It appears some are indeed anticipating earnings instability, because these conditions should normally provide more support to the share price.

Before you settle on your opinion, we've discovered 1 warning sign for Shanghai Ganglian E-Commerce Holdings that you should be aware of.

If you're unsure about the strength of Shanghai Ganglian E-Commerce Holdings' 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.