Solomon Systech (International) Limited's (HKG:2878) 35% Dip Still Leaving Some Shareholders Feeling Restless Over Its P/ERatio

Solomon Systech (International) Limited (HKG:2878) shares have had a horrible month, losing 35% after a relatively good period beforehand. Looking at the bigger picture, even after this poor month the stock is up 27% in the last year.

Although its price has dipped substantially, you could still be forgiven for feeling indifferent about Solomon Systech (International)'s P/E ratio of 11.3x, since the median price-to-earnings (or "P/E") ratio in Hong Kong is also close to 11x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

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For instance, Solomon Systech (International)'s receding earnings in recent times would have to be some food for thought. One possibility is that the P/E is moderate because investors think the company might still do enough to be in line with the broader market in the near future. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

Check out our latest analysis for Solomon Systech (International)

Although there are no analyst estimates available for Solomon Systech (International), take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Does Growth Match The P/E?

There's an inherent assumption that a company should be matching the market for P/E ratios like Solomon Systech (International)'s to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 48%. As a result, earnings from three years ago have also fallen 58% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 18% shows it's an unpleasant look.

In light of this, it's somewhat alarming that Solomon Systech (International)'s P/E sits in line with the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a 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.

What We Can Learn From Solomon Systech (International)'s P/E?

Solomon Systech (International)'s 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.

Our examination of Solomon Systech (International) revealed its shrinking earnings over the medium-term aren't impacting its P/E as much as we would have predicted, given the market is set to grow. 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.

You always need to take note of risks, for example - Solomon Systech (International) has 1 warning sign we think you should be aware of.

Of course, you might also be able to find a better stock than Solomon Systech (International). So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.