To the annoyance of some shareholders, Jiangxi Synergy Pharmaceutical Co., Ltd. (SZSE:300636) shares are down a considerable 28% in the last month, which continues a horrid run for the company. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 50% loss during that time.

Even after such a large drop in price, you could still be forgiven for feeling indifferent about Jiangxi Synergy Pharmaceutical's P/E ratio of 30.4x, since the median price-to-earnings (or "P/E") ratio in China is also close to 30x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Jiangxi Synergy Pharmaceutical has been doing quite well of late. One possibility is that the P/E is moderate because investors think the company's earnings will be less resilient moving forward. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

See our latest analysis for Jiangxi Synergy Pharmaceutical

Is There Some Growth For Jiangxi Synergy Pharmaceutical?

There's an inherent assumption that a company should be matching the market for P/E ratios like Jiangxi Synergy Pharmaceutical's to be considered reasonable.

Retrospectively, the last year delivered a decent 4.0% gain to the company's bottom line. The solid recent performance means it was also able to grow EPS by 16% 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 18% during the coming year according to the sole analyst following the company. With the market predicted to deliver 42% growth , the company is positioned for a weaker earnings result.

With this information, we find it interesting that Jiangxi Synergy Pharmaceutical is trading at a fairly similar P/E to the market. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

What We Can Learn From Jiangxi Synergy Pharmaceutical's P/E?

Following Jiangxi Synergy Pharmaceutical's share price tumble, its P/E is now hanging on to the median market P/E. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Jiangxi Synergy Pharmaceutical currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Jiangxi Synergy Pharmaceutical 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.

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.