With a price-to-earnings (or "P/E") ratio of 48x Zhejiang Wolwo Bio-Pharmaceutical Co., Ltd. (SZSE:300357) may be sending bearish signals at the moment, given that almost half of all companies in China have P/E ratios under 34x and even P/E's lower than 20x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.
With earnings that are retreating more than the market's of late, Zhejiang Wolwo Bio-Pharmaceutical has been very sluggish. It might be that many expect the dismal earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be very nervous about the viability of the share price.
See our latest analysis for Zhejiang Wolwo Bio-Pharmaceutical
Is There Enough Growth For Zhejiang Wolwo Bio-Pharmaceutical?
In order to justify its P/E ratio, Zhejiang Wolwo Bio-Pharmaceutical would need to produce impressive growth in excess of the market.
Retrospectively, the last year delivered a frustrating 25% decrease to the company's bottom line. At least EPS has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.
Turning to the outlook, the next year should generate growth of 41% as estimated by the two analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 43%, which is not materially different.
With this information, we find it interesting that Zhejiang Wolwo Bio-Pharmaceutical is trading at a high P/E compared to the market. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.
What We Can Learn From Zhejiang Wolwo Bio-Pharmaceutical's P/E?
Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.
Our examination of Zhejiang Wolwo Bio-Pharmaceutical's analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.
Before you take the next step, you should know about the 1 warning sign for Zhejiang Wolwo Bio-Pharmaceutical that we have uncovered.
You might be able to find a better investment than Zhejiang Wolwo Bio-Pharmaceutical. 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.