To the annoyance of some shareholders, Shandong Weigao Group Medical Polymer Company Limited (HKG:1066) shares are down a considerable 25% 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 64% share price decline.

In spite of the heavy fall in price, you could still be forgiven for feeling indifferent about Shandong Weigao Group Medical Polymer's P/E ratio of 8.6x, since the median price-to-earnings (or "P/E") ratio in Hong Kong is also close to 9x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

With earnings that are retreating more than the market's of late, Shandong Weigao Group Medical Polymer 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. You'd much rather the company wasn't bleeding earnings if you still believe in the business. If not, then existing shareholders may be a little nervous about the viability of the share price.

What Are Growth Metrics Telling Us About The P/E?

Shandong Weigao Group Medical Polymer's P/E ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 7.5%. That put a dampener on the good run it was having over the longer-term as its three-year EPS growth is still a noteworthy 23% in total. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 7.7% per year as estimated by the nine analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 16% per annum, which is noticeably more attractive.

In light of this, it's curious that Shandong Weigao Group Medical Polymer's P/E sits in line with the majority of other companies. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

What We Can Learn From Shandong Weigao Group Medical Polymer's P/E?

Shandong Weigao Group Medical Polymer'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 Shandong Weigao Group Medical Polymer's analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E as much as we would have predicted. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Having said that, be aware Shandong Weigao Group Medical Polymer is showing 1 warning sign in our investment analysis, you should know about.

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).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.