Investors Don't See Light At End Of New Huadu Technology Co., Ltd.'s (SZSE:002264) Tunnel And Push Stock Down 26%

The New Huadu Technology Co., Ltd. (SZSE:002264) share price has softened a substantial 26% over the previous 30 days, handing back much of the gains the stock has made lately. Longer-term shareholders would now have taken a real hit with the stock declining 8.1% in the last year.

Even after such a large drop in price, New Huadu Technology may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 17.6x, since almost half of all companies in China have P/E ratios greater than 30x and even P/E's higher than 57x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's exceedingly strong of late, New Huadu Technology has been doing very well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

View our latest analysis for New Huadu 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 New Huadu Technology's earnings, revenue and cash flow.

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

The only time you'd be truly comfortable seeing a P/E as low as New Huadu Technology's is when the company's growth is on track to lag the market.

If we review the last year of earnings growth, the company posted a terrific increase of 43%. Pleasingly, EPS has also lifted 34% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 37% shows it's noticeably less attractive on an annualised basis.

In light of this, it's understandable that New Huadu Technology's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.

The Key Takeaway

The softening of New Huadu Technology's shares means its P/E is now sitting at a pretty low level. 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 New Huadu Technology maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.

Before you take the next step, you should know about the 2 warning signs for New Huadu Technology that we have uncovered.

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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