Some Guangdong High Dream Intellectualized Machinery Co., Ltd. (SZSE:300720) Shareholders Look For Exit As Shares Take 26% Pounding

The Guangdong High Dream Intellectualized Machinery Co., Ltd. (SZSE:300720) share price has fared very poorly over the last month, falling by a substantial 26%. The recent drop has obliterated the annual return, with the share price now down 7.1% over that longer period.

Even after such a large drop in price, given close to half the companies in China have price-to-earnings ratios (or "P/E's") below 28x, you may still consider Guangdong High Dream Intellectualized Machinery as a stock to avoid entirely with its 64.1x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

As an illustration, earnings have deteriorated at Guangdong High Dream Intellectualized Machinery over the last year, which is not ideal at all. 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.

See our latest analysis for Guangdong High Dream Intellectualized Machinery

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 Guangdong High Dream Intellectualized Machinery's earnings, revenue and cash flow.

How Is Guangdong High Dream Intellectualized Machinery's Growth Trending?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Guangdong High Dream Intellectualized Machinery's to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 4.1%. This means it has also seen a slide in earnings over the longer-term as EPS is down 54% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

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.

In light of this, it's alarming that Guangdong High Dream Intellectualized Machinery's P/E sits above the majority of other companies. 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. 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.

The Bottom Line On Guangdong High Dream Intellectualized Machinery's P/E

Guangdong High Dream Intellectualized Machinery's shares may have retreated, but its P/E is still flying high. 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 Guangdong High Dream Intellectualized Machinery currently trades on a much 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 high P/E lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

You need to take note of risks, for example - Guangdong High Dream Intellectualized Machinery has 3 warning signs (and 2 which are a bit unpleasant) we think you should know about.

If these risks are making you reconsider your opinion on Guangdong High Dream Intellectualized Machinery, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com