China Sunshine Paper Holdings Company Limited (HKG:2002) May Have Run Too Fast Too Soon With Recent 31% Price Plummet

The China Sunshine Paper Holdings Company Limited (HKG:2002) share price has fared very poorly over the last month, falling by a substantial 31%. The recent drop has obliterated the annual return, with the share price now down 10.0% over that longer period.

In spite of the heavy fall in price, you could still be forgiven for feeling indifferent about China Sunshine Paper Holdings' P/E ratio of 7.8x, since the median price-to-earnings (or "P/E") ratio in Hong Kong is also close to 9x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

As an illustration, earnings have deteriorated at China Sunshine Paper Holdings over the last year, which is not ideal at all. It might be that many expect the company to put the disappointing earnings performance behind them over the coming period, which has kept the P/E from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.

See our latest analysis for China Sunshine Paper Holdings

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

How Is China Sunshine Paper Holdings' Growth Trending?

There's an inherent assumption that a company should be matching the market for P/E ratios like China Sunshine Paper Holdings' to be considered reasonable.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 42%. As a result, earnings from three years ago have also fallen 58% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 22% shows it's an unpleasant look.

In light of this, it's somewhat alarming that China Sunshine Paper Holdings' P/E sits in line with the majority of other companies. Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh on the share price eventually.

What We Can Learn From China Sunshine Paper Holdings' P/E?

China Sunshine Paper Holdings' plummeting stock price has brought its P/E right back to the rest of the market. 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 China Sunshine Paper Holdings currently trades on a higher than expected P/E since its recent earnings have been in decline over the medium-term. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.

It is also worth noting that we have found 5 warning signs for China Sunshine Paper Holdings (2 make us uncomfortable!) that you need to take into consideration.

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.