To the annoyance of some shareholders, Sunfonda Group Holdings Limited (HKG:1771) shares are down a considerable 27% in the last month, which continues a horrid run for the company. For any long-term shareholders, the last month ends a year to forget by locking in a 61% share price decline.

Following the heavy fall in price, given close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") above 9x, you may consider Sunfonda Group Holdings as a highly attractive investment with its 2.7x P/E ratio. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

For instance, Sunfonda Group Holdings' receding earnings in recent times would have to be some food for thought. One possibility is that the P/E is low because investors think the company won't do enough to avoid underperforming the broader market in the near future. 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 Sunfonda Group Holdings

Is There Any Growth For Sunfonda Group Holdings?

In order to justify its P/E ratio, Sunfonda Group Holdings would need to produce anemic growth that's substantially trailing the market.

Retrospectively, the last year delivered a frustrating 36% decrease to the company's bottom line. This has soured the latest three-year period, which nevertheless managed to deliver a decent 9.0% overall rise in EPS. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been mostly respectable for the company.

Comparing that to the market, which is predicted to deliver 20% 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 Sunfonda Group Holdings is trading at a P/E lower than the market. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

The Bottom Line On Sunfonda Group Holdings' P/E

Having almost fallen off a cliff, Sunfonda Group Holdings' share price has pulled its P/E way down as well. 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.

As we suspected, our examination of Sunfonda Group Holdings revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. 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's always necessary to consider the ever-present spectre of investment risk. We've identified 4 warning signs with Sunfonda Group Holdings (at least 2 which are significant), and understanding them should be part of your investment process.

Of course, you might also be able to find a better stock than Sunfonda Group Holdings. So you may wish to see this free collection of other companies that sit on P/E's below 20x 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.