China Shineway Pharmaceutical Group Limited (HKG:2877) shares have continued their recent momentum with a 30% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 40% in the last year.
Although its price has surged higher, there still wouldn't be many who think China Shineway Pharmaceutical Group's price-to-earnings (or "P/E") ratio of 8.3x is worth a mention when the median P/E in Hong Kong is similar at about 9x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.
Recent times have been pleasing for China Shineway 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 moderate because investors think the company's earnings will be less resilient moving forward. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.
Does Growth Match The P/E?
The only time you'd be comfortable seeing a P/E like China Shineway Pharmaceutical Group's is when the company's growth is tracking the market closely.
If we review the last year of earnings growth, the company posted a terrific increase of 52%. The strong recent performance means it was also able to grow EPS by 91% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.
Turning to the outlook, the next three years should generate growth of 12% per year as estimated by the three analysts watching the company. With the market predicted to deliver 15% growth each year, the company is positioned for a weaker earnings result.
With this information, we find it interesting that China Shineway Pharmaceutical Group is trading at a fairly similar P/E to the market. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.
What We Can Learn From China Shineway Pharmaceutical Group's P/E?
China Shineway Pharmaceutical Group appears to be back in favour with a solid price jump getting its P/E back in line with most other companies. 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.
Our examination of China Shineway Pharmaceutical Group's analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E as much as we would have predicted. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.
It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with China Shineway Pharmaceutical Group, and understanding should be part of your investment process.
If these risks are making you reconsider your opinion on China Shineway 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.