Guangdong Huicheng Vacuum Technology Co., Ltd. (SZSE:301392) May Have Run Too Fast Too Soon With Recent 25% Price Plummet

Guangdong Huicheng Vacuum Technology Co., Ltd. (SZSE:301392) shares have retraced a considerable 25% in the last month, reversing a fair amount of their solid recent performance. To make matters worse, the recent drop has wiped out a year's worth of gains with the share price now back where it started a year ago.

In spite of the heavy fall in price, Guangdong Huicheng Vacuum Technology may still be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 66.5x, since almost half of all companies in China have P/E ratios under 34x and even P/E's lower than 20x 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.

Guangdong Huicheng Vacuum Technology has been doing a decent job lately as it's been growing earnings at a reasonable pace. It might be that many expect the reasonable earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Guangdong Huicheng Vacuum Technology

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Guangdong Huicheng Vacuum Technology's earnings, revenue and cash flow.

What Are Growth Metrics Telling Us About The High P/E?

In order to justify its P/E ratio, Guangdong Huicheng Vacuum Technology would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered a decent 3.6% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen an unpleasant 2.3% overall drop in EPS. 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 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 Guangdong Huicheng Vacuum Technology 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 Final Word

Guangdong Huicheng Vacuum Technology's shares may have retreated, but its P/E is still flying high. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Guangdong Huicheng Vacuum Technology 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. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

You should always think about risks. Case in point, we've spotted 3 warning signs for Guangdong Huicheng Vacuum Technology you should be aware of, and 2 of them are a bit concerning.

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.