When close to half the companies in Hong Kong have price-to-earnings ratios (or “P/E’s”) below 11x, you may consider Sino Biopharmaceutical Limited (HKG:1177) as a stock to avoid entirely with its 59.2x 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.
With earnings that are retreating more than the market’s of late, Sino Biopharmaceutical has been very sluggish. It might be that many expect the dismal earnings performance to recover substantially, which has kept the P/E from collapsing. You’d really hope so, otherwise you’re paying a pretty hefty price for no particular reason.free report on Sino Biopharmaceutical will help you uncover what’s on the horizon.
Does Growth Match The High P/E?
Sino Biopharmaceutical’s P/E ratio would be typical for a company that’s expected to deliver very strong growth, and importantly, perform much better than the market.
If we review the last year of earnings, dishearteningly the company’s profits fell to the tune of 73%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 21% overall rise in EPS. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of earnings growth.
Looking ahead now, EPS is anticipated to climb by 23% per annum during the coming three years according to the analysts following the company. That’s shaping up to be materially higher than the 19% per year growth forecast for the broader market.
With this information, we can see why Sino Biopharmaceutical is trading at such a high P/E compared to the market. Apparently shareholders aren’t keen to offload something that is potentially eyeing a more prosperous future.
The Final Word
The price-to-earnings ratio’s power isn’t primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
As we suspected, our examination of Sino Biopharmaceutical’s analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn’t great enough to justify a lower P/E ratio. It’s hard to see the share price falling strongly in the near future under these circumstances.
You always need to take note of risks, for example – Sino Biopharmaceutical has 2 warning signs we think you should be aware of.
You might be able to find a better investment than Sino Biopharmaceutical. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).
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This article by Simply Wall St is general in nature. 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.
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