To the annoyance of some shareholders, Shenzhen Sunway Communication Co., Ltd. (SZSE:300136) shares are down a considerable 26% in the last month, which continues a horrid run for the company. Longer-term shareholders will rue the drop in the share price, since it's now virtually flat for the year after a promising few quarters.

Even after such a large drop in price, you could still be forgiven for feeling indifferent about Shenzhen Sunway Communication's P/E ratio of 29.8x, since the median price-to-earnings (or "P/E") ratio in China is also close to 30x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

With earnings that are retreating more than the market's of late, Shenzhen Sunway Communication has been very sluggish. One possibility is that the P/E is moderate because investors think the company's earnings trend will eventually fall in line with most others in the market. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. If not, then existing shareholders may be a little nervous about the viability of the share price.

Check out our latest analysis for Shenzhen Sunway Communication

Does Growth Match The P/E?

The only time you'd be comfortable seeing a P/E like Shenzhen Sunway Communication's is when the company's growth is tracking the market closely.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 10%. As a result, earnings from three years ago have also fallen 40% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Shifting to the future, estimates from the four analysts covering the company suggest earnings should grow by 62% over the next year. Meanwhile, the rest of the market is forecast to only expand by 42%, which is noticeably less attractive.

With this information, we find it interesting that Shenzhen Sunway Communication is trading at a fairly similar P/E to the market. Apparently some shareholders are skeptical of the forecasts and have been accepting lower selling prices.

The Key Takeaway

Shenzhen Sunway Communication's plummeting stock price has brought its P/E right back to the rest of the market. 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.

Our examination of Shenzhen Sunway Communication's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E as much as we would have predicted. There could be some unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

A lot of potential risks can sit within a company's balance sheet. Take a look at our free balance sheet analysis for Shenzhen Sunway Communication with six simple checks on some of these key factors.

You might be able to find a better investment than Shenzhen Sunway Communication. 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.