When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 35x, you may consider Shijiazhuang Yiling Pharmaceutical Co., Ltd. (SZSE:002603) as a highly attractive investment with its 14x 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.

Recent times have been pleasing for Shijiazhuang Yiling Pharmaceutical as its earnings have risen in spite of the market's earnings going into reverse. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. 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 out of favour.

See our latest analysis for Shijiazhuang Yiling Pharmaceutical

How Is Shijiazhuang Yiling Pharmaceutical's Growth Trending?

In order to justify its P/E ratio, Shijiazhuang Yiling Pharmaceutical would need to produce anemic growth that's substantially trailing the market.

Retrospectively, the last year delivered an exceptional 76% gain to the company's bottom line. Pleasingly, EPS has also lifted 157% in aggregate from three years ago, thanks to the last 12 months of growth. 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 slump, contracting by 9.9% during the coming year according to the seven analysts following the company. Meanwhile, the broader market is forecast to expand by 43%, which paints a poor picture.

In light of this, it's understandable that Shijiazhuang Yiling Pharmaceutical's P/E would sit below the majority of other companies. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

What We Can Learn From Shijiazhuang Yiling Pharmaceutical's P/E?

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Shijiazhuang Yiling Pharmaceutical maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

It is also worth noting that we have found 1 warning sign for Shijiazhuang Yiling Pharmaceutical that you need to take into consideration.

You might be able to find a better investment than Shijiazhuang Yiling Pharmaceutical. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.