Shanghai Pharmaceuticals Holding Co., Ltd's (SHSE:601607) price-to-earnings (or "P/E") ratio of 13.8x might make it look like a strong buy right now compared to the market in China, where around half of the companies have P/E ratios above 35x and even P/E's above 65x are quite common. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

With earnings that are retreating more than the market's of late, Shanghai Pharmaceuticals Holding has been very sluggish. It seems that many are expecting the dismal earnings performance to persist, which has repressed the P/E. You'd much rather the company wasn't bleeding earnings if you still believe in the business. Or at the very least, you'd be hoping the earnings slide doesn't get any worse if your plan is to pick up some stock while it's out of favour.

See our latest analysis for Shanghai Pharmaceuticals Holding

How Is Shanghai Pharmaceuticals Holding's Growth Trending?

Shanghai Pharmaceuticals Holding's P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.

Retrospectively, the last year delivered a frustrating 28% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 18% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next year should generate growth of 37% as estimated by the seven analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 44%, which is noticeably more attractive.

With this information, we can see why Shanghai Pharmaceuticals Holding is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

What We Can Learn From Shanghai Pharmaceuticals Holding's P/E?

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Shanghai Pharmaceuticals Holding's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for Shanghai Pharmaceuticals Holding with six simple checks will allow you to discover any risks that could be an issue.

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.