When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 34x, you may consider Zhejiang Huahai Pharmaceutical Co., Ltd. (SHSE:600521) as an attractive investment with its 19.2x 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 have been pleasing for Zhejiang Huahai Pharmaceutical as its earnings have risen in spite of the market's earnings going into reverse. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
View our latest analysis for Zhejiang Huahai Pharmaceutical
Is There Any Growth For Zhejiang Huahai Pharmaceutical?
There's an inherent assumption that a company should underperform the market for P/E ratios like Zhejiang Huahai Pharmaceutical's to be considered reasonable.
If we review the last year of earnings growth, the company posted a terrific increase of 58%. As a result, it also grew EPS by 19% in total over the last three years. So we can start by confirming that the company has actually done a good job of growing earnings over that time.
Looking ahead now, EPS is anticipated to climb by 28% during the coming year according to the dual analysts following the company. Meanwhile, the rest of the market is forecast to expand by 44%, which is noticeably more attractive.
With this information, we can see why Zhejiang Huahai Pharmaceutical is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.
The Bottom Line On Zhejiang Huahai Pharmaceutical'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.
We've established that Zhejiang Huahai Pharmaceutical maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.
Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Zhejiang Huahai Pharmaceutical that you should be aware of.
If you're unsure about the strength of Zhejiang Huahai Pharmaceutical'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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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.