When close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") above 10x, you may consider Grand Pharmaceutical Group Limited (HKG:512) as an attractive investment with its 5.5x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.
Recent times have been pleasing for Grand Pharmaceutical Group as its earnings have risen in spite of the market's earnings going into reverse. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
View our latest analysis for Grand Pharmaceutical Group
Is There Any Growth For Grand Pharmaceutical Group?
In order to justify its P/E ratio, Grand Pharmaceutical Group would need to produce sluggish growth that's trailing the market.
Taking a look back first, we see that the company grew earnings per share by an impressive 25% last year. The strong recent performance means it was also able to grow EPS by 74% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.
Looking ahead now, EPS is anticipated to climb by 5.8% per annum during the coming three years according to the only analyst following the company. With the market predicted to deliver 16% growth each year, the company is positioned for a weaker earnings result.
In light of this, it's understandable that Grand Pharmaceutical Group's P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.
The Final Word
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.
As we suspected, our examination of Grand Pharmaceutical Group's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.
And what about other risks? Every company has them, and we've spotted 1 warning sign for Grand Pharmaceutical Group you should know about.
If these risks are making you reconsider your opinion on Grand Pharmaceutical Group, 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.