When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 28x, you may consider Renhe Pharmacy Co., Ltd. (SZSE:000650) as a highly attractive investment with its 12.2x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.
The earnings growth achieved at Renhe Pharmacy over the last year would be more than acceptable for most companies. One possibility is that the P/E is low because investors think this respectable earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be optimistic about the future direction of the share price.
See our latest analysis for Renhe Pharmacy
How Is Renhe Pharmacy's Growth Trending?
There's an inherent assumption that a company should far underperform the market for P/E ratios like Renhe Pharmacy's to be considered reasonable.
If we review the last year of earnings growth, the company posted a worthy increase of 9.1%. The solid recent performance means it was also able to grow EPS by 23% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been respectable for the company.
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 can see why Renhe Pharmacy is trading at a P/E lower than the market. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.
The Bottom Line On Renhe Pharmacy's P/E
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 Renhe Pharmacy revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.
Before you take the next step, you should know about the 2 warning signs for Renhe Pharmacy that we have uncovered.
Of course, you might also be able to find a better stock than Renhe Pharmacy. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.
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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.