There wouldn't be many who think Chengdu Easton Biopharmaceuticals Co., Ltd.'s (SHSE:688513) price-to-earnings (or "P/E") ratio of 22.4x is worth a mention when the median P/E in China is similar at about 24x. 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.
Chengdu Easton Biopharmaceuticals 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 deteriorate like the rest, which has kept the P/E from rising. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.
Is There Some Growth For Chengdu Easton Biopharmaceuticals?
In order to justify its P/E ratio, Chengdu Easton Biopharmaceuticals would need to produce growth that's similar to the market.
Taking a look back first, we see that there was hardly any earnings per share growth to speak of for the company over the past year. Although pleasingly EPS has lifted 35% in aggregate from three years ago, notwithstanding the last 12 months. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
Shifting to the future, estimates from the dual analysts covering the company suggest earnings should grow by 24% over the next year. Meanwhile, the rest of the market is forecast to expand by 42%, which is noticeably more attractive.
In light of this, it's curious that Chengdu Easton Biopharmaceuticals' P/E sits in line with the majority of other companies. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.
The Key Takeaway
Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.
Our examination of Chengdu Easton Biopharmaceuticals' analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E as much as we would have predicted. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.
You always need to take note of risks, for example - Chengdu Easton Biopharmaceuticals has 2 warning signs we think you should be aware of.
If you're unsure about the strength of Chengdu Easton Biopharmaceuticals' 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.
