Some Confidence Is Lacking In Newcapec Electronics Co., Ltd. (SZSE:300248) As Shares Slide 28%

Newcapec Electronics Co., Ltd. (SZSE:300248) shares have had a horrible month, losing 28% after a relatively good period beforehand. Longer-term shareholders would now have taken a real hit with the stock declining 6.0% in the last year.

In spite of the heavy fall in price, you could still be forgiven for feeling indifferent about Newcapec Electronics' P/E ratio of 37.3x, since the median price-to-earnings (or "P/E") ratio in China is also close to 34x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

For instance, Newcapec Electronics' receding earnings in recent times would have to be some food for thought. It might be that many expect the company to put the disappointing earnings performance behind them over the coming period, which has kept the P/E from falling. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

Check out our latest analysis for Newcapec Electronics

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

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

The only time you'd be comfortable seeing a P/E like Newcapec Electronics' is when the company's growth is tracking the market closely.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 11%. The last three years don't look nice either as the company has shrunk EPS by 23% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

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 Newcapec Electronics is trading at a fairly similar P/E to the market. Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now. 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 the recent negative growth rates.

What We Can Learn From Newcapec Electronics' P/E?

Following Newcapec Electronics' share price tumble, its P/E is now hanging on to the median market P/E. 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.

We've established that Newcapec Electronics currently trades on a higher than expected P/E since its recent earnings have been in decline over the medium-term. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the moderate P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

There are also other vital risk factors to consider and we've discovered 3 warning signs for Newcapec Electronics (2 don't sit too well with us!) that you should be aware of before investing here.

You might be able to find a better investment than Newcapec Electronics. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.