Zhejiang Garden Biopharmaceutical Co.,Ltd.'s (SZSE:300401) price-to-earnings (or "P/E") ratio of 28.4x might make it look like a buy right now compared to the market in China, where around half of the companies have P/E ratios above 36x and even P/E's above 69x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Recent times have been pleasing for Zhejiang Garden BiopharmaceuticalLtd as its earnings have risen in spite of the market's earnings going into reverse. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Is There Any Growth For Zhejiang Garden BiopharmaceuticalLtd?

There's an inherent assumption that a company should underperform the market for P/E ratios like Zhejiang Garden BiopharmaceuticalLtd's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 64% gain to the company's bottom line. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 30% overall. 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 52% as estimated by the two analysts watching the company. That's shaping up to be materially higher than the 38% growth forecast for the broader market.

With this information, we find it odd that Zhejiang Garden BiopharmaceuticalLtd is trading at a P/E lower than the market. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

The Bottom Line On Zhejiang Garden BiopharmaceuticalLtd's P/E

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Zhejiang Garden BiopharmaceuticalLtd's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E anywhere near as much as we would have predicted. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.

Having said that, be aware Zhejiang Garden BiopharmaceuticalLtd is showing 1 warning sign in our investment analysis, you should know about.

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

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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.