The Shengfeng Development Limited (NASDAQ:SFWL) share price has fared very poorly over the last month, falling by a substantial 38%. For any long-term shareholders, the last month ends a year to forget by locking in a 89% share price decline.

Even after such a large drop in price, Shengfeng Development may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 8.8x, since almost half of all companies in the United States have P/E ratios greater than 18x and even P/E's higher than 32x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Shengfeng Development has been doing a good job lately as it's been growing earnings at a solid pace. It might be that many expect the respectable earnings performance to degrade substantially, which has repressed the P/E. If that doesn't eventuate, then existing shareholders have reason to be optimistic about the future direction of the share price.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Shengfeng Development's earnings, revenue and cash flow.

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

There's an inherent assumption that a company should underperform the market for P/E ratios like Shengfeng Development's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 29% gain to the company's bottom line. The latest three year period has also seen an excellent 64% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

This is in contrast to the rest of the market, which is expected to grow by 13% over the next year, materially lower than the company's recent medium-term annualised growth rates.

With this information, we find it odd that Shengfeng Development is trading at a P/E lower than the market. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

The Key Takeaway

Shengfeng Development's P/E has taken a tumble along with its share price. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Shengfeng Development currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. It appears many are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

Plus, you should also learn about these 2 warning signs we've spotted with Shengfeng Development.

If these risks are making you reconsider your opinion on Shengfeng Development, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.