HPGC Renmintongtai Pharmaceutical Corporation's (SHSE:600829) Share Price Boosted 26% But Its Business Prospects Need A Lift Too

Despite an already strong run, HPGC Renmintongtai Pharmaceutical Corporation (SHSE:600829) shares have been powering on, with a gain of 26% in the last thirty days. Taking a wider view, although not as strong as the last month, the full year gain of 18% is also fairly reasonable.

In spite of the firm bounce in price, HPGC Renmintongtai Pharmaceutical's price-to-earnings (or "P/E") ratio of 21x might still 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 38x and even P/E's above 75x 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.

For instance, HPGC Renmintongtai Pharmaceutical's receding earnings in recent times would have to be some food for thought. One possibility is that the P/E is low because investors think the company won't do enough to avoid underperforming the broader market in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

View our latest analysis for HPGC Renmintongtai Pharmaceutical

Although there are no analyst estimates available for HPGC Renmintongtai Pharmaceutical, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Does Growth Match The Low P/E?

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

Retrospectively, the last year delivered a frustrating 18% decrease to the company's bottom line. This has soured the latest three-year period, which nevertheless managed to deliver a decent 8.0% overall rise in EPS. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been mostly respectable for the company.

This is in contrast to the rest of the market, which is expected to grow by 38% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's understandable that HPGC Renmintongtai Pharmaceutical's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.

The Key Takeaway

HPGC Renmintongtai Pharmaceutical's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. We'd say 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 HPGC Renmintongtai Pharmaceutical revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.

Before you settle on your opinion, we've discovered 1 warning sign for HPGC Renmintongtai Pharmaceutical that you should be aware of.

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.