Shanghai Shyndec Pharmaceutical Co., Ltd. (SHSE:600420) shares have continued their recent momentum with a 33% gain in the last month alone. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 9.8% in the last twelve months.

Although its price has surged higher, Shanghai Shyndec Pharmaceutical's price-to-earnings (or "P/E") ratio of 18.6x might still make it look like a buy right now compared to the market in China, where around half of the companies have P/E ratios above 32x and even P/E's above 60x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Shanghai Shyndec Pharmaceutical hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If you still like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Does Growth Match The Low P/E?

The only time you'd be truly comfortable seeing a P/E as low as Shanghai Shyndec Pharmaceutical's is when the company's growth is on track to lag the market.

Retrospectively, the last year delivered a frustrating 6.5% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 12% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the sole analyst covering the company suggest earnings should grow by 3.6% over the next year. With the market predicted to deliver 39% growth , the company is positioned for a weaker earnings result.

With this information, we can see why Shanghai Shyndec Pharmaceutical is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

What We Can Learn From Shanghai Shyndec Pharmaceutical's P/E?

Shanghai Shyndec Pharmaceutical's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Shanghai Shyndec Pharmaceutical maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

You always need to take note of risks, for example - Shanghai Shyndec Pharmaceutical has 2 warning signs we think you should be aware of.

If you're unsure about the strength of Shanghai Shyndec Pharmaceutical's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.