When close to half the companies in China have price-to-earnings ratios (or "P/E's") below 34x, you may consider Zhangzhou Pientzehuang Pharmaceutical., Ltd (SHSE:600436) as a stock to potentially avoid with its 49.9x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.
Recent times have been pleasing for Zhangzhou Pientzehuang Pharmaceutical as its earnings have risen in spite of the market's earnings going into reverse. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. If not, then existing shareholders might be a little nervous about the viability of the share price.
View our latest analysis for Zhangzhou Pientzehuang Pharmaceutical
What Are Growth Metrics Telling Us About The High P/E?
The only time you'd be truly comfortable seeing a P/E as high as Zhangzhou Pientzehuang Pharmaceutical's is when the company's growth is on track to outshine the market.
Retrospectively, the last year delivered a decent 14% gain to the company's bottom line. This was backed up an excellent period prior to see EPS up by 77% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.
Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 24% over the next year. Meanwhile, the rest of the market is forecast to expand by 44%, which is noticeably more attractive.
In light of this, it's alarming that Zhangzhou Pientzehuang Pharmaceutical's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.
The Bottom Line On Zhangzhou Pientzehuang Pharmaceutical's P/E
While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.
We've established that Zhangzhou Pientzehuang Pharmaceutical currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.
A lot of potential risks can sit within a company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Zhangzhou Pientzehuang Pharmaceutical with six simple checks.
You might be able to find a better investment than Zhangzhou Pientzehuang Pharmaceutical. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).
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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.
