When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 32x, you may consider Zhejiang Xianju Pharmaceutical Co.,Ltd. (SZSE:002332) as an attractive investment with its 20.8x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Recent times haven't been advantageous for Zhejiang Xianju PharmaceuticalLtd as its earnings have been falling quicker than most other companies. It seems that many are expecting the dismal earnings performance to persist, which has repressed the P/E. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. If not, then existing shareholders will probably struggle to get excited about the future direction of the share price.

Is There Any Growth For Zhejiang Xianju PharmaceuticalLtd?

Zhejiang Xianju PharmaceuticalLtd's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 19%. This has erased any of its gains during the last three years, with practically no change in EPS being achieved in total. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Shifting to the future, estimates from the seven analysts covering the company suggest earnings should grow by 20% per annum over the next three years. Meanwhile, the rest of the market is forecast to expand by 19% per year, which is not materially different.

With this information, we find it odd that Zhejiang Xianju PharmaceuticalLtd is trading at a P/E lower than the market. Apparently some shareholders are doubtful of the forecasts and have been accepting lower selling prices.

The Final Word

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

Our examination of Zhejiang Xianju PharmaceuticalLtd's analyst forecasts revealed that its market-matching earnings outlook isn't contributing to its P/E as much as we would have predicted. When we see an average earnings outlook with market-like growth, we assume potential risks are what might be placing pressure on the P/E ratio. It appears some are indeed anticipating earnings instability, because these conditions should normally provide more support to the share price.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Zhejiang Xianju PharmaceuticalLtd, and understanding should be part of your investment process.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.