Lacklustre Performance Is Driving Precious Dragon Technology Holdings Limited's (HKG:1861) 28% Price Drop

Precious Dragon Technology Holdings Limited (HKG:1861) shares have had a horrible month, losing 28% after a relatively good period beforehand. The recent drop has obliterated the annual return, with the share price now down 4.8% over that longer period.

Even after such a large drop in price, Precious Dragon Technology Holdings may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 6.7x, since almost half of all companies in Hong Kong have P/E ratios greater than 9x and even P/E's higher than 18x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Recent times have been quite advantageous for Precious Dragon Technology Holdings as its earnings have been rising very briskly. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for Precious Dragon Technology Holdings

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Precious Dragon Technology Holdings will help you shine a light on its historical performance.

How Is Precious Dragon Technology Holdings' Growth Trending?

There's an inherent assumption that a company should underperform the market for P/E ratios like Precious Dragon Technology Holdings' to be considered reasonable.

Retrospectively, the last year delivered an exceptional 130% gain to the company's bottom line. EPS has also lifted 12% in aggregate from three years ago, mostly thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

Comparing that to the market, which is predicted to deliver 22% 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 Precious Dragon Technology Holdings' 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 Final Word

The softening of Precious Dragon Technology Holdings' shares means its P/E is now sitting at a pretty low level. 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 Precious Dragon Technology Holdings maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Precious Dragon Technology Holdings (2 are concerning) you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.