Why We're Not Concerned Yet About Shandong Sito Bio-technology Co., Ltd.'s (SZSE:300583) 26% Share Price Plunge

The Shandong Sito Bio-technology Co., Ltd. (SZSE:300583) share price has fared very poorly over the last month, falling by a substantial 26%. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 25% in that time.

Although its price has dipped substantially, given close to half the companies in China have price-to-earnings ratios (or "P/E's") below 30x, you may still consider Shandong Sito Bio-technology as a stock to avoid entirely with its 68.5x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

While the market has experienced earnings growth lately, Shandong Sito Bio-technology's earnings have gone into reverse gear, which is not great. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Shandong Sito Bio-technology

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Does Growth Match The High P/E?

In order to justify its P/E ratio, Shandong Sito Bio-technology would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered a frustrating 27% decrease to the company's bottom line. At least EPS has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 32% per annum as estimated by the one analyst watching the company. That's shaping up to be materially higher than the 25% per annum growth forecast for the broader market.

In light of this, it's understandable that Shandong Sito Bio-technology's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From Shandong Sito Bio-technology's P/E?

Shandong Sito Bio-technology's shares may have retreated, but its P/E is still flying high. 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.

As we suspected, our examination of Shandong Sito Bio-technology's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

There are also other vital risk factors to consider and we've discovered 2 warning signs for Shandong Sito Bio-technology (1 is significant!) that you should be aware of before investing here.

If these risks are making you reconsider your opinion on Shandong Sito Bio-technology, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.