Some Shandong Homey Aquatic Development Co.,Ltd. (SHSE:600467) Shareholders Look For Exit As Shares Take 29% Pounding

The Shandong Homey Aquatic Development Co.,Ltd. (SHSE:600467) share price has softened a substantial 29% over the previous 30 days, handing back much of the gains the stock has made lately. The recent drop has obliterated the annual return, with the share price now down 8.4% over that longer period.

In spite of the heavy fall in price, Shandong Homey Aquatic DevelopmentLtd may still be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 75.6x, since almost half of all companies in China have P/E ratios under 32x and even P/E's lower than 19x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

For example, consider that Shandong Homey Aquatic DevelopmentLtd's financial performance has been poor lately as its earnings have been in decline. 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.

View our latest analysis for Shandong Homey Aquatic DevelopmentLtd

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 Shandong Homey Aquatic DevelopmentLtd's earnings, revenue and cash flow.

Does Growth Match The High P/E?

The only time you'd be truly comfortable seeing a P/E as steep as Shandong Homey Aquatic DevelopmentLtd's is when the company's growth is on track to outshine the market decidedly.

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 7.3%. This means it has also seen a slide in earnings over the longer-term as EPS is down 36% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 38% shows it's an unpleasant look.

In light of this, it's alarming that Shandong Homey Aquatic DevelopmentLtd'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.

What We Can Learn From Shandong Homey Aquatic DevelopmentLtd's P/E?

Even after such a strong price drop, Shandong Homey Aquatic DevelopmentLtd's P/E still exceeds the rest of the market significantly. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

Our examination of Shandong Homey Aquatic DevelopmentLtd 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. 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. 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.

You need to take note of risks, for example - Shandong Homey Aquatic DevelopmentLtd has 4 warning signs (and 2 which are a bit concerning) we think you should know about.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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.