Those holding PharmaBlock Sciences (Nanjing), Inc. (SZSE:300725) shares would be relieved that the share price has rebounded 30% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 46% in the last twelve months.

Following the firm bounce in price, PharmaBlock Sciences (Nanjing)'s price-to-earnings (or "P/E") ratio of 34.4x might make it look like a sell right now compared to the market in China, where around half of the companies have P/E ratios below 31x and even P/E's below 19x are quite common. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Recent times haven't been advantageous for PharmaBlock Sciences (Nanjing) as its earnings have been falling quicker than most other companies. It might be that many expect the dismal earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

How Is PharmaBlock Sciences (Nanjing)'s Growth Trending?

PharmaBlock Sciences (Nanjing)'s P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

Retrospectively, the last year delivered a frustrating 26% decrease to the company's bottom line. That put a dampener on the good run it was having over the longer-term as its three-year EPS growth is still a noteworthy 16% in total. So we can start by confirming that the company has generally done a good job of growing earnings over that time, even though it had some hiccups along the way.

Shifting to the future, estimates from the four analysts covering the company suggest earnings should grow by 38% over the next year. That's shaping up to be similar to the 40% growth forecast for the broader market.

With this information, we find it interesting that PharmaBlock Sciences (Nanjing) is trading at a high P/E compared to the market. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

The Final Word

PharmaBlock Sciences (Nanjing)'s P/E is getting right up there since its shares have risen strongly. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that PharmaBlock Sciences (Nanjing) currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

You always need to take note of risks, for example - PharmaBlock Sciences (Nanjing) has 1 warning sign we think you should be aware of.

If you're unsure about the strength of PharmaBlock Sciences (Nanjing)'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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