Shenzhen Ridge Engineering Consulting Co., Ltd.'s (SZSE:300977) Share Price Is Still Matching Investor Opinion Despite 30% Slump

The Shenzhen Ridge Engineering Consulting Co., Ltd. (SZSE:300977) share price has softened a substantial 30% over the previous 30 days, handing back much of the gains the stock has made lately. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 26% share price drop.

Even after such a large drop in price, Shenzhen Ridge Engineering Consulting may still be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 62.7x, since almost half of all companies in China have P/E ratios under 27x and even P/E's lower than 16x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Shenzhen Ridge Engineering Consulting hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

Check out our latest analysis for Shenzhen Ridge Engineering Consulting

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How Is Shenzhen Ridge Engineering Consulting's Growth Trending?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Shenzhen Ridge Engineering Consulting's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 23% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 79% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 49% each year as estimated by the dual analysts watching the company. That's shaping up to be materially higher than the 24% per annum growth forecast for the broader market.

With this information, we can see why Shenzhen Ridge Engineering Consulting is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

A significant share price dive has done very little to deflate Shenzhen Ridge Engineering Consulting's very lofty P/E. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Shenzhen Ridge Engineering Consulting maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

Before you settle on your opinion, we've discovered 2 warning signs for Shenzhen Ridge Engineering Consulting (1 can't be ignored!) that you should be aware of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on 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.

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