Why Investors Shouldn't Be Surprised By Shanxi Lu'an Environmental Energy Development Co., Ltd.'s (SHSE:601699) 26% Share Price Plunge

Shanxi Lu'an Environmental Energy Development Co., Ltd. (SHSE:601699) shareholders won't be pleased to see that the share price has had a very rough month, dropping 26% and undoing the prior period's positive performance. The last month has meant the stock is now only up 2.7% during the last year.

Although its price has dipped substantially, given about half the companies in China have price-to-earnings ratios (or "P/E's") above 32x, you may still consider Shanxi Lu'an Environmental Energy Development as a highly attractive investment with its 7.8x P/E ratio. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

Shanxi Lu'an Environmental Energy Development hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. If you still 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.

Check out our latest analysis for Shanxi Lu'an Environmental Energy Development

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Is There Any Growth For Shanxi Lu'an Environmental Energy Development?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Shanxi Lu'an Environmental Energy Development's to be considered reasonable.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 44%. Still, the latest three year period has seen an excellent 307% overall rise in EPS, in spite of its unsatisfying short-term performance. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Shifting to the future, estimates from the five analysts covering the company suggest earnings should grow by 2.1% over the next year. That's shaping up to be materially lower than the 36% growth forecast for the broader market.

In light of this, it's understandable that Shanxi Lu'an Environmental Energy Development's P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

What We Can Learn From Shanxi Lu'an Environmental Energy Development's P/E?

Shares in Shanxi Lu'an Environmental Energy Development have plummeted and its P/E is now low enough to touch the ground. 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 Shanxi Lu'an Environmental Energy Development maintains its low P/E on the weakness of its forecast growth being lower than the wider market, 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 these conditions improve, they will continue to form a barrier for the share price around these levels.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Shanxi Lu'an Environmental Energy Development, and understanding should be part of your investment process.

Of course, you might also be able to find a better stock than Shanxi Lu'an Environmental Energy Development. 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.