With a price-to-earnings (or "P/E") ratio of 40.6x Zhejiang Tailin BioEngineering Co.,Ltd (SZSE:300813) may be sending bearish signals at the moment, given that almost half of all companies in China have P/E ratios under 29x and even P/E's lower than 18x 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.
For example, consider that Zhejiang Tailin BioEngineeringLtd's financial performance has been poor lately as its earnings have been in decline. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.
Check out our latest analysis for Zhejiang Tailin BioEngineeringLtd
How Is Zhejiang Tailin BioEngineeringLtd's Growth Trending?
In order to justify its P/E ratio, Zhejiang Tailin BioEngineeringLtd would need to produce impressive growth 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 20%. Regardless, EPS has managed to lift by a handy 17% in aggregate from three years ago, thanks to the earlier period of growth. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of earnings growth.
This is in contrast to the rest of the market, which is expected to grow by 42% over the next year, materially higher than the company's recent medium-term annualised growth rates.
With this information, we find it concerning that Zhejiang Tailin BioEngineeringLtd 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 good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.
What We Can Learn From Zhejiang Tailin BioEngineeringLtd'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 Tailin BioEngineeringLtd revealed its three-year earnings trends aren't impacting its high P/E anywhere near as much as we would have predicted, given they look worse than current market expectations. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.
Before you settle on your opinion, we've discovered 1 warning sign for Zhejiang Tailin BioEngineeringLtd that you should be aware of.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.
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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.