More Unpleasant Surprises Could Be In Store For UCAP Cloud Information Technology Co.,Ltd.'s (SHSE:688228) Shares After Tumbling 27%

The UCAP Cloud Information Technology Co.,Ltd. (SHSE:688228) share price has fared very poorly over the last month, falling by a substantial 27%. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 28% share price drop.

In spite of the heavy fall in price, given close to half the companies in China have price-to-earnings ratios (or "P/E's") below 31x, you may still consider UCAP Cloud Information TechnologyLtd as a stock to avoid entirely with its 67x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

For instance, UCAP Cloud Information TechnologyLtd's receding earnings in recent times would have to be some food for thought. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.

Check out our latest analysis for UCAP Cloud Information TechnologyLtd

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

Does Growth Match The High P/E?

UCAP Cloud Information TechnologyLtd's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 56%. This means it has also seen a slide in earnings over the longer-term as EPS is down 41% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Comparing that to the market, which is predicted to deliver 36% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

With this information, we find it concerning that UCAP Cloud Information TechnologyLtd is trading at a P/E higher than the market. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

What We Can Learn From UCAP Cloud Information TechnologyLtd's P/E?

Even after such a strong price drop, UCAP Cloud Information TechnologyLtd's P/E still exceeds the rest of the market significantly. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

Our examination of UCAP Cloud Information TechnologyLtd 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.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for UCAP Cloud Information TechnologyLtd (1 makes us a bit uncomfortable) you should be aware of.

If you're unsure about the strength of UCAP Cloud Information TechnologyLtd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.