Sichuan Jiuyuan Yinhai Software.Co.,Ltd (SZSE:002777) Shares Slammed 26% But Getting In Cheap Might Be Difficult Regardless

Sichuan Jiuyuan Yinhai Software.Co.,Ltd (SZSE:002777) shareholders won't be pleased to see that the share price has had a very rough month, dropping 26% and undoing the prior period's positive performance. For any long-term shareholders, the last month ends a year to forget by locking in a 51% share price decline.

In spite of the heavy fall in price, Sichuan Jiuyuan Yinhai Software.Co.Ltd's price-to-earnings (or "P/E") ratio of 43.9x might still make it look like a sell right now compared to the market in China, where around half of the companies have P/E ratios below 29x and even P/E's below 18x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

While the market has experienced earnings growth lately, Sichuan Jiuyuan Yinhai Software.Co.Ltd's earnings have gone into reverse gear, which is not great. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.

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How Is Sichuan Jiuyuan Yinhai Software.Co.Ltd's Growth Trending?

There's an inherent assumption that a company should outperform the market for P/E ratios like Sichuan Jiuyuan Yinhai Software.Co.Ltd's to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 9.1%. The last three years don't look nice either as the company has shrunk EPS by 9.4% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the three analysts covering the company suggest earnings should grow by 28% each year over the next three years. That's shaping up to be materially higher than the 21% per annum growth forecast for the broader market.

With this information, we can see why Sichuan Jiuyuan Yinhai Software.Co.Ltd is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Key Takeaway

There's still some solid strength behind Sichuan Jiuyuan Yinhai Software.Co.Ltd's P/E, if not its share price lately. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Sichuan Jiuyuan Yinhai Software.Co.Ltd maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

Before you take the next step, you should know about the 1 warning sign for Sichuan Jiuyuan Yinhai Software.Co.Ltd that we have uncovered.

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.