To the annoyance of some shareholders, Zhejiang Ausun Pharmaceutical Co., Ltd. (SHSE:603229) shares are down a considerable 26% 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, Zhejiang Ausun Pharmaceutical's price-to-earnings (or "P/E") ratio of 20.6x might still make it look like a buy right now compared to the market in China, where around half of the companies have P/E ratios above 30x and even P/E's above 54x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
Zhejiang Ausun Pharmaceutical certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. 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.
View our latest analysis for Zhejiang Ausun Pharmaceutical
What Are Growth Metrics Telling Us About The Low P/E?
Zhejiang Ausun Pharmaceutical's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.
Taking a look back first, we see that the company grew earnings per share by an impressive 30% last year. The strong recent performance means it was also able to grow EPS by 252% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.
Shifting to the future, estimates from the dual analysts covering the company suggest earnings should grow by 27% over the next year. Meanwhile, the rest of the market is forecast to expand by 42%, which is noticeably more attractive.
With this information, we can see why Zhejiang Ausun Pharmaceutical is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.
The Bottom Line On Zhejiang Ausun Pharmaceutical's P/E
Zhejiang Ausun Pharmaceutical's recently weak share price has pulled its P/E below most other companies. 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 Zhejiang Ausun Pharmaceutical's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.
Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Zhejiang Ausun Pharmaceutical (1 is potentially serious) you should be aware of.
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.
