When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 35x, you may consider Nanjing King-Friend Biochemical Pharmaceutical Co.,Ltd. (SHSE:603707) as an attractive investment with its 23.8x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
Nanjing King-Friend Biochemical PharmaceuticalLtd has been struggling lately as its earnings have declined faster than most other companies. The P/E is probably low because investors think this poor earnings performance isn't going to improve at all. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. Or at the very least, you'd be hoping the earnings slide doesn't get any worse if your plan is to pick up some stock while it's out of favour.
See our latest analysis for Nanjing King-Friend Biochemical PharmaceuticalLtd
Does Growth Match The Low P/E?
In order to justify its P/E ratio, Nanjing King-Friend Biochemical PharmaceuticalLtd would need to produce sluggish growth that's trailing the market.
Retrospectively, the last year delivered a frustrating 10% decrease to the company's bottom line. This has soured the latest three-year period, which nevertheless managed to deliver a decent 29% overall rise in EPS. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been mostly respectable for the company.
Looking ahead now, EPS is anticipated to climb by 29% during the coming year according to the three analysts following the company. That's shaping up to be materially lower than the 44% growth forecast for the broader market.
In light of this, it's understandable that Nanjing King-Friend Biochemical PharmaceuticalLtd's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.
What We Can Learn From Nanjing King-Friend Biochemical PharmaceuticalLtd's P/E?
Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
As we suspected, our examination of Nanjing King-Friend Biochemical PharmaceuticalLtd's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.
And what about other risks? Every company has them, and we've spotted 1 warning sign for Nanjing King-Friend Biochemical PharmaceuticalLtd you should know about.
If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.
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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.