Sobute New Materials Co., Ltd (SHSE:603916) Stock's 25% Dive Might Signal An Opportunity But It Requires Some Scrutiny

Sobute New Materials Co., Ltd (SHSE:603916) shares have had a horrible month, losing 25% after a relatively good period beforehand. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 45% share price drop.

After such a large drop in price, Sobute New Materials' price-to-earnings (or "P/E") ratio of 21.7x might make it look like a buy right now compared to the market in China, where around half of the companies have P/E ratios above 31x and even P/E's above 57x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Sobute New Materials could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. 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 Sobute New Materials

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Does Growth Match The Low P/E?

In order to justify its P/E ratio, Sobute New Materials would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered a frustrating 45% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 73% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Turning to the outlook, the next three years should generate growth of 25% per annum as estimated by the six analysts watching the company. That's shaping up to be similar to the 25% each year growth forecast for the broader market.

In light of this, it's peculiar that Sobute New Materials' P/E sits below the majority of other companies. It may be that most investors are not convinced the company can achieve future growth expectations.

The Final Word

Sobute New Materials' recently weak share price has pulled its P/E below most other companies. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Sobute New Materials currently trades on a lower than expected P/E since its forecast growth is in line with the wider market. There could be some unobserved threats to earnings preventing the P/E ratio from matching the outlook. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

There are also other vital risk factors to consider before investing and we've discovered 3 warning signs for Sobute New Materials that you should be aware of.

Of course, you might also be able to find a better stock than Sobute New Materials. 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.

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