Shenzhen SDG Service Co.,Ltd.'s (SZSE:300917) 25% Share Price Plunge Could Signal Some Risk

The Shenzhen SDG Service Co.,Ltd. (SZSE:300917) share price has fared very poorly over the last month, falling by a substantial 25%. Still, a bad month hasn't completely ruined the past year with the stock gaining 92%, which is great even in a bull market.

Even after such a large drop in price, Shenzhen SDG ServiceLtd may still be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 68.2x, since almost half of all companies in China have P/E ratios under 34x and even P/E's lower than 20x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

It looks like earnings growth has deserted Shenzhen SDG ServiceLtd recently, which is not something to boast about. It might be that many are expecting an improvement to the uninspiring earnings performance 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.

See our latest analysis for Shenzhen SDG ServiceLtd

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Shenzhen SDG ServiceLtd will help you shine a light on its historical performance.

How Is Shenzhen SDG ServiceLtd's Growth Trending?

In order to justify its P/E ratio, Shenzhen SDG ServiceLtd would need to produce outstanding growth well in excess of the market.

Taking a look back first, we see that there was hardly any earnings per share growth to speak of for the company over the past year. That's essentially a continuation of what we've seen over the last three years, as its EPS growth has been virtually non-existent for that entire period. So it seems apparent to us that the company has struggled to grow earnings meaningfully over that time.

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

With this information, we find it concerning that Shenzhen SDG ServiceLtd is trading at a P/E higher than the market. 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.

The Key Takeaway

Even after such a strong price drop, Shenzhen SDG ServiceLtd's P/E still exceeds the rest of the market significantly. 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.

Our examination of Shenzhen SDG ServiceLtd 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. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

You should always think about risks. Case in point, we've spotted 1 warning sign for Shenzhen SDG ServiceLtd you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.