The Jiangsu Lianhuan Pharmaceutical Co., Ltd. (SHSE:600513) share price has done very well over the last month, posting an excellent gain of 28%. Unfortunately, despite the strong performance over the last month, the full year gain of 6.5% isn't as attractive.

Even after such a large jump in price, given about half the companies in China have price-to-earnings ratios (or "P/E's") above 37x, you may still consider Jiangsu Lianhuan Pharmaceutical as an attractive investment with its 23.4x 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.

The recent earnings growth at Jiangsu Lianhuan Pharmaceutical would have to be considered satisfactory if not spectacular. One possibility is that the P/E is low because investors think this good earnings growth might actually underperform the broader market in the near future. 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.

Is There Any Growth For Jiangsu Lianhuan Pharmaceutical?

In order to justify its P/E ratio, Jiangsu Lianhuan Pharmaceutical would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered a decent 6.5% gain to the company's bottom line. The latest three year period has also seen a 28% overall rise in EPS, aided somewhat by its short-term performance. Accordingly, shareholders would have probably been satisfied with the 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.

In light of this, it's understandable that Jiangsu Lianhuan Pharmaceutical's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.

The Final Word

Jiangsu Lianhuan Pharmaceutical's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. 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.

As we suspected, our examination of Jiangsu Lianhuan Pharmaceutical revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Before you take the next step, you should know about the 1 warning sign for Jiangsu Lianhuan Pharmaceutical that we have uncovered.

Of course, you might also be able to find a better stock than Jiangsu Lianhuan Pharmaceutical. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.