The Market Doesn't Like What It Sees From Guangdong Hongxing Industrial Co., Ltd.'s (SZSE:001209) Earnings Yet As Shares Tumble 26%

Guangdong Hongxing Industrial Co., Ltd. (SZSE:001209) shares have retraced a considerable 26% in the last month, reversing a fair amount of their solid recent performance. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 17% share price drop.

Even after such a large drop in price, given about half the companies in China have price-to-earnings ratios (or "P/E's") above 33x, you may still consider Guangdong Hongxing Industrial as an attractive investment with its 24.2x 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 limited.

Guangdong Hongxing Industrial certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

See our latest analysis for Guangdong Hongxing Industrial

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 Hongxing Industrial's earnings, revenue and cash flow.

How Is Guangdong Hongxing Industrial's Growth Trending?

There's an inherent assumption that a company should underperform the market for P/E ratios like Guangdong Hongxing Industrial's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 41%. Still, incredibly EPS has fallen 48% in total from three years ago, which is quite disappointing. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Comparing that to the market, which is predicted to deliver 38% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

With this information, we are not surprised that Guangdong Hongxing Industrial is trading at a P/E lower than the market. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

What We Can Learn From Guangdong Hongxing Industrial's P/E?

The softening of Guangdong Hongxing Industrial's shares means its P/E is now sitting at a pretty low level. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Guangdong Hongxing Industrial maintains its low P/E on the weakness of its sliding earnings over the medium-term, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

You need to take note of risks, for example - Guangdong Hongxing Industrial has 4 warning signs (and 1 which can't be ignored) we think you should know about.

If these risks are making you reconsider your opinion on Guangdong Hongxing Industrial, explore our interactive list of high quality stocks to get an idea of what else is out there.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.