Why Investors Shouldn't Be Surprised By Imeik Technology Development Co.,Ltd.'s (SZSE:300896) 25% Share Price Plunge

Imeik Technology Development Co.,Ltd. (SZSE:300896) shareholders that were waiting for something to happen have been dealt a blow with a 25% share price drop in the last month. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 24% share price drop.

In spite of the heavy fall in price, given about half the companies in China have price-to-earnings ratios (or "P/E's") above 33x, you may still consider Imeik Technology DevelopmentLtd as an attractive investment with its 24.9x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Imeik Technology DevelopmentLtd has been doing quite well of late. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. If you 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.

See our latest analysis for Imeik Technology DevelopmentLtd

Keen to find out how analysts think Imeik Technology DevelopmentLtd's future stacks up against the industry? In that case, our free report is a great place to start.

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

There's an inherent assumption that a company should underperform the market for P/E ratios like Imeik Technology DevelopmentLtd's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 20%. Pleasingly, EPS has also lifted 136% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 19% over the next year. That's shaping up to be materially lower than the 38% growth forecast for the broader market.

With this information, we can see why Imeik Technology DevelopmentLtd is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

What We Can Learn From Imeik Technology DevelopmentLtd's P/E?

The softening of Imeik Technology DevelopmentLtd's shares means its P/E is now sitting at a pretty low level. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Imeik Technology DevelopmentLtd's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

A lot of potential risks can sit within a company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Imeik Technology DevelopmentLtd with six simple checks.

Of course, you might also be able to find a better stock than Imeik Technology DevelopmentLtd. 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.