Jiangsu Hengrui Medicine Co., Ltd.'s (SHSE:600276) price-to-earnings (or "P/E") ratio of 63.3x might make it look like a strong sell right now compared to the market in China, where around half of the companies have P/E ratios below 26x and even P/E's below 16x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.
Recent times have been pleasing for Jiangsu Hengrui Medicine as its earnings have risen in spite of the market's earnings going into reverse. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors' willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
Is There Enough Growth For Jiangsu Hengrui Medicine?
In order to justify its P/E ratio, Jiangsu Hengrui Medicine would need to produce outstanding growth well in excess of the market.
Retrospectively, the last year delivered an exceptional 20% gain to the company's bottom line. Still, incredibly EPS has fallen 28% in total from three years ago, which is quite disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.
Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 34% per annum over the next three years. Meanwhile, the rest of the market is forecast to only expand by 22% per annum, which is noticeably less attractive.
With this information, we can see why Jiangsu Hengrui Medicine is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.
The Key Takeaway
Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
As we suspected, our examination of Jiangsu Hengrui Medicine's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.
The company's balance sheet is another key area for risk analysis. You can assess many of the main risks through our free balance sheet analysis for Jiangsu Hengrui Medicine with six simple checks.
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.