Shanghai Lingyun Industries Development Co., Ltd's (SHSE:900957) 29% Dip In Price Shows Sentiment Is Matching Earnings

The Shanghai Lingyun Industries Development Co., Ltd (SHSE:900957) share price has fared very poorly over the last month, falling by a substantial 29%. 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, given about half the companies in China have price-to-earnings ratios (or "P/E's") above 33x, you may still consider Shanghai Lingyun Industries Development as an attractive investment with its 23.5x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

For example, consider that Shanghai Lingyun Industries Development's financial performance has been poor lately as its earnings have been in decline. It might be that many expect the disappointing earnings performance to continue or accelerate, which has repressed the P/E. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

Check out our latest analysis for Shanghai Lingyun Industries Development

Although there are no analyst estimates available for Shanghai Lingyun Industries Development, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Shanghai Lingyun Industries Development's Growth Trending?

In order to justify its P/E ratio, Shanghai Lingyun Industries Development would need to produce sluggish growth that's trailing the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 24%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 12% overall rise in EPS. So we can start by confirming that the company has generally done a good job of growing earnings over that time, even though it had some hiccups along the way.

Comparing that to the market, which is predicted to deliver 38% 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 understandable that Shanghai Lingyun Industries Development's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.

The Bottom Line On Shanghai Lingyun Industries Development's P/E

Shanghai Lingyun Industries Development's P/E has taken a tumble along with its share price. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Shanghai Lingyun Industries Development maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.

It is also worth noting that we have found 1 warning sign for Shanghai Lingyun Industries Development that you need to take into consideration.

If these risks are making you reconsider your opinion on Shanghai Lingyun Industries Development, 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.