Shenzhen Hepalink Pharmaceutical Group Co., Ltd. (SZSE:002399) shareholders that were waiting for something to happen have been dealt a blow with a 35% share price drop in the last month. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 45% share price drop.

Even after such a large drop in price, given close to half the companies in China have price-to-earnings ratios (or "P/E's") below 26x, you may still consider Shenzhen Hepalink Pharmaceutical Group as a stock to avoid entirely with its 51.4x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

With earnings that are retreating more than the market's of late, Shenzhen Hepalink Pharmaceutical Group has been very sluggish. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Does Growth Match The High P/E?

In order to justify its P/E ratio, Shenzhen Hepalink Pharmaceutical Group would need to produce outstanding growth well in excess of the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 49%. This means it has also seen a slide in earnings over the longer-term as EPS is down 83% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next year should generate growth of 228% as estimated by the one analyst watching the company. Meanwhile, the rest of the market is forecast to only expand by 42%, which is noticeably less attractive.

In light of this, it's understandable that Shenzhen Hepalink Pharmaceutical Group's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Shenzhen Hepalink Pharmaceutical Group's P/E

Even after such a strong price drop, Shenzhen Hepalink Pharmaceutical Group's P/E still exceeds the rest of the market significantly. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Shenzhen Hepalink Pharmaceutical Group's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

It is also worth noting that we have found 3 warning signs for Shenzhen Hepalink Pharmaceutical Group that you need to take into consideration.

You might be able to find a better investment than Shenzhen Hepalink Pharmaceutical Group. 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.