Some Nanjing Wavelength Opto-Electronic Science & Technology Co.,Ltd. (SZSE:301421) Shareholders Look For Exit As Shares Take 28% Pounding

Unfortunately for some shareholders, the Nanjing Wavelength Opto-Electronic Science & Technology Co.,Ltd. (SZSE:301421) share price has dived 28% in the last thirty days, prolonging recent pain. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 57% loss during that time.

In spite of the heavy fall in price, given close to half the companies in China have price-to-earnings ratios (or "P/E's") below 27x, you may still consider Nanjing Wavelength Opto-Electronic Science & TechnologyLtd as a stock to avoid entirely with its 75.1x 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.

For instance, Nanjing Wavelength Opto-Electronic Science & TechnologyLtd's receding earnings in recent times would have to be some food for thought. 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.

Check out 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.

Is There Enough Growth For Nanjing Wavelength Opto-Electronic Science & TechnologyLtd?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Nanjing Wavelength Opto-Electronic Science & TechnologyLtd's to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 33%. As a result, earnings from three years ago have also fallen 31% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

In contrast to the company, the rest of the market is expected to grow by 39% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

With this information, we find it concerning that Nanjing Wavelength Opto-Electronic Science & TechnologyLtd is trading at a P/E higher than the market. 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 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 shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Nanjing Wavelength Opto-Electronic Science & TechnologyLtd (1 is concerning!) that you need to be mindful of.

If you're unsure about the strength of Nanjing Wavelength Opto-Electronic Science & TechnologyLtd'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.