With a price-to-earnings (or "P/E") ratio of 16.1x Shanghai Fudan-Zhangjiang Bio-Pharmaceutical Co.,Ltd. (HKG:1349) may be sending very bearish signals at the moment, given that almost half of all companies in Hong Kong have P/E ratios under 9x and even P/E's lower than 4x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.
As an illustration, earnings have deteriorated at Shanghai Fudan-Zhangjiang Bio-PharmaceuticalLtd over the last year, which is not ideal at all. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.
Check out our latest analysis for Shanghai Fudan-Zhangjiang Bio-PharmaceuticalLtdSEHK:1349 Price Based on Past Earnings September 4th 2022 Although there are no analyst estimates available for Shanghai Fudan-Zhangjiang Bio-PharmaceuticalLtd, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.
How Is Shanghai Fudan-Zhangjiang Bio-PharmaceuticalLtd's Growth Trending?
In order to justify its P/E ratio, Shanghai Fudan-Zhangjiang Bio-PharmaceuticalLtd would need to produce outstanding growth well in excess of the market.
Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 44%. As a result, earnings from three years ago have also fallen 3.0% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.
Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 22% shows it's an unpleasant look.
With this information, we find it concerning that Shanghai Fudan-Zhangjiang Bio-PharmaceuticalLtd is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.
The Bottom Line On Shanghai Fudan-Zhangjiang Bio-PharmaceuticalLtd's P/E
Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.
Our examination of Shanghai Fudan-Zhangjiang Bio-PharmaceuticalLtd revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.
You should always think about risks. Case in point, we've spotted 3 warning signs for Shanghai Fudan-Zhangjiang Bio-PharmaceuticalLtd you should be aware of.
If you're unsure about the strength of Shanghai Fudan-Zhangjiang Bio-PharmaceuticalLtd'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.