Some Confidence Is Lacking In Nanjing Wavelength Opto-Electronic Science & Technology Co.,Ltd. (SZSE:301421) As Shares Slide 25%

The Nanjing Wavelength Opto-Electronic Science & Technology Co.,Ltd. (SZSE:301421) share price has fared very poorly over the last month, falling by a substantial 25%. Longer-term shareholders will rue the drop in the share price, since it's now virtually flat for the year after a promising few quarters.

Even after such a large drop in price, Nanjing Wavelength Opto-Electronic Science & TechnologyLtd may still be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 76.8x, since almost half of all companies in China have P/E ratios under 27x and even P/E's lower than 17x are not unusual. 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 Nanjing Wavelength Opto-Electronic Science & TechnologyLtd 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 Nanjing Wavelength Opto-Electronic Science & TechnologyLtd

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Nanjing Wavelength Opto-Electronic Science & TechnologyLtd will help you shine a light on its historical performance.

How Is Nanjing Wavelength Opto-Electronic Science & TechnologyLtd's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as steep as Nanjing Wavelength Opto-Electronic Science & TechnologyLtd's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered a frustrating 7.6% decrease to the company's bottom line. However, a few very strong years before that means that it was still able to grow EPS by an impressive 33% in total over the last three years. 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.

This is in contrast to the rest of the market, which is expected to grow by 36% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's alarming that Nanjing Wavelength Opto-Electronic Science & TechnologyLtd'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 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 Key Takeaway

A significant share price dive has done very little to deflate Nanjing Wavelength Opto-Electronic Science & TechnologyLtd's very lofty P/E. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

Our examination of Nanjing Wavelength Opto-Electronic Science & TechnologyLtd 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.

Having said that, be aware Nanjing Wavelength Opto-Electronic Science & TechnologyLtd is showing 2 warning signs in our investment analysis, and 1 of those is a bit concerning.

You might be able to find a better investment than Nanjing Wavelength Opto-Electronic Science & TechnologyLtd. 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.