More Unpleasant Surprises Could Be In Store For Huarui Electrical Appliance Co.,Ltd.'s (SZSE:300626) Shares After Tumbling 27%

To the annoyance of some shareholders, Huarui Electrical Appliance Co.,Ltd. (SZSE:300626) shares are down a considerable 27% in the last month, which continues a horrid run for the company. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 34% in that time.

Even after such a large drop in price, given close to half the companies in China have price-to-earnings ratios (or "P/E's") below 29x, you may still consider Huarui Electrical ApplianceLtd as a stock to avoid entirely with its 59.2x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

For example, consider that Huarui Electrical ApplianceLtd's financial performance has been poor lately as its earnings have been in decline. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.

View our latest analysis for Huarui Electrical ApplianceLtd

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

Does Growth Match The High P/E?

In order to justify its P/E ratio, Huarui Electrical ApplianceLtd would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered a frustrating 51% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 4.3% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

In contrast to the company, the rest of the market is expected to grow by 36% 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 Huarui Electrical ApplianceLtd 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. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

What We Can Learn From Huarui Electrical ApplianceLtd's P/E?

Huarui Electrical ApplianceLtd's shares may have retreated, but its P/E is still flying high. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Huarui Electrical ApplianceLtd currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. 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.

Having said that, be aware Huarui Electrical ApplianceLtd is showing 5 warning signs in our investment analysis, and 3 of those are a bit concerning.

You might be able to find a better investment than Huarui Electrical ApplianceLtd. 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.