Why Investors Shouldn't Be Surprised By Pan Asia Environmental Protection Group Limited's (HKG:556) 50% Share Price Plunge

The Pan Asia Environmental Protection Group Limited (HKG:556) share price has fared very poorly over the last month, falling by a substantial 50%. For any long-term shareholders, the last month ends a year to forget by locking in a 68% share price decline.

Even after such a large drop in price, Pan Asia Environmental Protection Group's price-to-earnings (or "P/E") ratio of -212.1x might still make it look like a strong buy right now compared to the market in Hong Kong, where around half of the companies have P/E ratios above 10x and even P/E's above 21x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.

For instance, Pan Asia Environmental Protection Group's receding earnings in recent times would have to be some food for thought. 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.

See our latest analysis for Pan Asia Environmental Protection Group

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 Pan Asia Environmental Protection Group's earnings, revenue and cash flow.

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

The only time you'd be truly comfortable seeing a P/E as depressed as Pan Asia Environmental Protection Group's is when the company's growth is on track to lag the market decidedly.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 111%. At least EPS has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Comparing that to the market, which is predicted to deliver 25% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

With this information, we can see why Pan Asia Environmental Protection Group is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.

The Key Takeaway

Shares in Pan Asia Environmental Protection Group have plummeted and its P/E is now low enough to touch the ground. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Pan Asia Environmental Protection Group 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. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

It is also worth noting that we have found 2 warning signs for Pan Asia Environmental Protection Group (1 is a bit unpleasant!) that you need to take into consideration.

You might be able to find a better investment than Pan Asia Environmental Protection Group. 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.