Shanghai No.1 Pharmacy Co.,Ltd.'s (SHSE:600833) price-to-earnings (or "P/E") ratio of 17.2x might make it look like a buy right now compared to the market in China, where around half of the companies have P/E ratios above 28x and even P/E's above 50x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
Shanghai No.1 PharmacyLtd certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. It might be that many expect the strong earnings performance to degrade substantially, 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.
SHSE:600833 Price to Earnings Ratio vs Industry February 2nd 2024 Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Shanghai No.1 PharmacyLtd will help you shine a light on its historical performance.
Does Growth Match The Low P/E?
The only time you'd be truly comfortable seeing a P/E as low as Shanghai No.1 PharmacyLtd's is when the company's growth is on track to lag the market.
If we review the last year of earnings growth, the company posted a terrific increase of 44%. Pleasingly, EPS has also lifted 73% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
Comparing that to the market, which is predicted to deliver 41% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.
With this information, we can see why Shanghai No.1 PharmacyLtd is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.
The Final Word
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.
As we suspected, our examination of Shanghai No.1 PharmacyLtd 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.
You always need to take note of risks, for example - Shanghai No.1 PharmacyLtd has 1 warning sign we think you should be aware of.
You might be able to find a better investment than Shanghai No.1 PharmacyLtd. 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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