Anhui Tongyuan Environment Energy Saving Co.,Ltd's (SHSE:688679) 26% Share Price Plunge Could Signal Some Risk

Unfortunately for some shareholders, the Anhui Tongyuan Environment Energy Saving Co.,Ltd (SHSE:688679) share price has dived 26% in the last thirty days, prolonging recent pain. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 31% share price drop.

In spite of the heavy fall in price, given around half the companies in China have price-to-earnings ratios (or "P/E's") below 30x, you may still consider Anhui Tongyuan Environment Energy SavingLtd as a stock to potentially avoid with its 36.4x P/E ratio. 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 instance, Anhui Tongyuan Environment Energy SavingLtd's receding earnings in recent times would have to be some food for thought. 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Anhui Tongyuan Environment Energy SavingLtd

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Does Growth Match The High P/E?

In order to justify its P/E ratio, Anhui Tongyuan Environment Energy SavingLtd would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered a frustrating 31% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 74% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 41% shows it's an unpleasant look.

In light of this, it's alarming that Anhui Tongyuan Environment Energy SavingLtd's P/E sits above the majority of other companies. 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.

The Bottom Line On Anhui Tongyuan Environment Energy SavingLtd's P/E

Despite the recent share price weakness, Anhui Tongyuan Environment Energy SavingLtd's P/E remains higher than most other companies. 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.

Our examination of Anhui Tongyuan Environment Energy SavingLtd revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. 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.

And what about other risks? Every company has them, and we've spotted 4 warning signs for Anhui Tongyuan Environment Energy SavingLtd (of which 1 doesn't sit too well with us!) you should know about.

Of course, you might also be able to find a better stock than Anhui Tongyuan Environment Energy SavingLtd. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.