Chengdu Easton Biopharmaceuticals Co., Ltd. (SHSE:688513) shareholders are no doubt pleased to see that the share price has bounced 28% in the last month, although it is still struggling to make up recently lost ground. Notwithstanding the latest gain, the annual share price return of 7.2% isn't as impressive.

Although its price has surged higher, you could still be forgiven for feeling indifferent about Chengdu Easton Biopharmaceuticals' P/E ratio of 26.4x, since the median price-to-earnings (or "P/E") ratio in China is also close to 26x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

While the market has experienced earnings growth lately, Chengdu Easton Biopharmaceuticals' earnings have gone into reverse gear, which is not great. One possibility is that the P/E is moderate because investors think this poor earnings performance will turn around. If not, then existing shareholders may be a little nervous about the viability of the share price.

What Are Growth Metrics Telling Us About The P/E?

Chengdu Easton Biopharmaceuticals' P/E ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the market.

Retrospectively, the last year delivered a frustrating 1.2% decrease to the company's bottom line. Regardless, EPS has managed to lift by a handy 12% in aggregate from three years ago, thanks to the earlier period of growth. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of earnings growth.

Shifting to the future, estimates from the three analysts covering the company suggest earnings should grow by 21% per annum over the next three years. That's shaping up to be similar to the 23% per annum growth forecast for the broader market.

With this information, we can see why Chengdu Easton Biopharmaceuticals is trading at a fairly similar P/E to the market. Apparently shareholders are comfortable to simply hold on while the company is keeping a low profile.

The Bottom Line On Chengdu Easton Biopharmaceuticals' P/E

Its shares have lifted substantially and now Chengdu Easton Biopharmaceuticals' P/E is also back up to the market median. 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.

We've established that Chengdu Easton Biopharmaceuticals maintains its moderate P/E off the back of its forecast growth being in line with the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings won't throw up any surprises. It's hard to see the share price moving strongly in either direction in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 2 warning signs for Chengdu Easton Biopharmaceuticals you should be aware of.

If these risks are making you reconsider your opinion on Chengdu Easton Biopharmaceuticals, explore our interactive list of high quality stocks to get an idea of what else is out there.

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