The Sichuan Goldstone Asia Pharmaceutical Inc. (SZSE:300434) share price has fared very poorly over the last month, falling by a substantial 26%. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 35% share price drop.

After such a large drop in price, Sichuan Goldstone Asia Pharmaceutical may be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 13x, since almost half of all companies in China have P/E ratios greater than 27x and even P/E's higher than 48x are not unusual. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

Recent times have been quite advantageous for Sichuan Goldstone Asia Pharmaceutical as its earnings have been rising very briskly. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

How Is Sichuan Goldstone Asia Pharmaceutical's Growth Trending?

Sichuan Goldstone Asia Pharmaceutical'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.

Taking a look back first, we see that the company grew earnings per share by an impressive 157% last year. Still, EPS has barely risen at all from three years ago in total, which is not ideal. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

This is in contrast to the rest of the market, which is expected to grow by 42% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we can see why Sichuan Goldstone Asia Pharmaceutical 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 Key Takeaway

Sichuan Goldstone Asia Pharmaceutical's P/E looks about as weak as its stock price lately. 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.

We've established that Sichuan Goldstone Asia Pharmaceutical maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.

The company's balance sheet is another key area for risk analysis. Our free balance sheet analysis for Sichuan Goldstone Asia Pharmaceutical with six simple checks will allow you to discover any risks that could be an issue.

If you're unsure about the strength of Sichuan Goldstone Asia Pharmaceutical's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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