Hollyland (China) Electronics Technology Corporation Limited's (SZSE:002729) 32% Share Price Plunge Could Signal Some Risk

Unfortunately for some shareholders, the Hollyland (China) Electronics Technology Corporation Limited (SZSE:002729) share price has dived 32% in the last thirty days, prolonging recent pain. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 42% share price drop.

In spite of the heavy fall in price, Hollyland (China) Electronics Technology's price-to-earnings (or "P/E") ratio of 75.1x might still make it look like a strong 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 highly elevated P/E.

As an illustration, earnings have deteriorated at Hollyland (China) Electronics Technology over the last year, which is not ideal at all. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.

See our latest analysis for Hollyland (China) Electronics Technology

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Hollyland (China) Electronics Technology's earnings, revenue and cash flow.

How Is Hollyland (China) Electronics Technology's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as steep as Hollyland (China) Electronics Technology's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered a frustrating 5.9% decrease to the company's bottom line. Still, the latest three year period has seen an excellent 46% overall rise in EPS, in spite of its unsatisfying short-term performance. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Comparing that to the market, which is predicted to deliver 35% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

In light of this, it's alarming that Hollyland (China) Electronics Technology's P/E sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Final Word

Hollyland (China) Electronics Technology's shares may have retreated, but its P/E is still flying high. 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 Hollyland (China) Electronics Technology revealed its three-year earnings trends aren't impacting its high P/E anywhere near as much as we would have predicted, given they look worse than current market expectations. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Hollyland (China) Electronics Technology, and understanding should be part of your investment process.

If you're unsure about the strength of Hollyland (China) Electronics Technology'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.