Sunshine Guojian Pharmaceutical (Shanghai) Co., Ltd (SHSE:688336) shares have had a really impressive month, gaining 30% after a shaky period beforehand. Unfortunately, despite the strong performance over the last month, the full year gain of 2.1% isn't as attractive.

Following the firm bounce in price, Sunshine Guojian Pharmaceutical (Shanghai) may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 41.3x, since almost half of all companies in China have P/E ratios under 29x and even P/E's lower than 18x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Sunshine Guojian Pharmaceutical (Shanghai) has been doing quite well of late. It seems that many are expecting the company to continue defying the broader market adversity, 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 Sunshine Guojian Pharmaceutical (Shanghai)'s Growth Trending?

Sunshine Guojian Pharmaceutical (Shanghai)'s P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 106% last year. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 0.4% per year as estimated by the three analysts watching the company. That's not great when the rest of the market is expected to grow by 19% per year.

With this information, we find it concerning that Sunshine Guojian Pharmaceutical (Shanghai) is trading at a P/E higher than the market. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock at any price. There's a very good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the negative growth outlook.

The Bottom Line On Sunshine Guojian Pharmaceutical (Shanghai)'s P/E

Sunshine Guojian Pharmaceutical (Shanghai) shares have received a push in the right direction, but its P/E is elevated too. 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 Sunshine Guojian Pharmaceutical (Shanghai)'s analyst forecasts revealed that its outlook for shrinking earnings isn't impacting its high P/E anywhere near as much as we would have predicted. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings are highly unlikely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Sunshine Guojian Pharmaceutical (Shanghai) (of which 1 is a bit concerning!) you should know about.

If you're unsure about the strength of Sunshine Guojian Pharmaceutical (Shanghai)'s 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.