Nanjing Hicin Pharmaceutical Co., Ltd. (SZSE:300584) shares have had a really impressive month, gaining 29% after a shaky period beforehand. Longer-term shareholders would be thankful for the recovery in the share price since it's now virtually flat for the year after the recent bounce.

After such a large jump in price, given close to half the companies in China have price-to-earnings ratios (or "P/E's") below 26x, you may consider Nanjing Hicin Pharmaceutical as a stock to avoid entirely with its 66x 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.

Earnings have risen firmly for Nanjing Hicin Pharmaceutical recently, which is pleasing to see. It might be that many expect the respectable earnings performance to beat most other companies over the coming period, which has increased investors' willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

How Is Nanjing Hicin Pharmaceutical's Growth Trending?

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

If we review the last year of earnings growth, the company posted a terrific increase of 17%. However, this wasn't enough as the latest three year period has seen a very unpleasant 27% drop in EPS in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 36% shows it's an unpleasant look.

With this information, we find it concerning that Nanjing Hicin Pharmaceutical is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

What We Can Learn From Nanjing Hicin Pharmaceutical's P/E?

Shares in Nanjing Hicin Pharmaceutical have built up some good momentum lately, which has really inflated its P/E. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Nanjing Hicin Pharmaceutical currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Before you take the next step, you should know about the 2 warning signs for Nanjing Hicin Pharmaceutical that we have uncovered.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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