Not Many Are Piling Into Shanghai Pharmaceuticals Holding Co., Ltd (SHSE:601607) Just Yet

Shanghai Pharmaceuticals Holding Co., Ltd's (SHSE:601607) price-to-earnings (or "P/E") ratio of 18x 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 30x and even P/E's above 58x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Recent times haven't been advantageous for Shanghai Pharmaceuticals Holding as its earnings have been falling quicker than most other companies. It seems that many are expecting the dismal earnings performance to persist, which has repressed the P/E. You'd much rather the company wasn't bleeding earnings if you still believe in the business. If not, then existing shareholders will probably struggle to get excited about the future direction of the share price.

See our latest analysis for Shanghai Pharmaceuticals Holding

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Shanghai Pharmaceuticals Holding.

Does Growth Match The Low P/E?

The only time you'd be truly comfortable seeing a P/E as low as Shanghai Pharmaceuticals Holding's is when the company's growth is on track to lag the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 9.6%. This means it has also seen a slide in earnings over the longer-term as EPS is down 44% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the ten analysts covering the company suggest earnings should grow by 17% each year over the next three years. With the market predicted to deliver 19% growth per annum, the company is positioned for a comparable earnings result.

In light of this, it's peculiar that Shanghai Pharmaceuticals Holding's P/E sits below the majority of other companies. It may be that most investors are not convinced the company can achieve future growth expectations.

The Bottom Line On Shanghai Pharmaceuticals Holding's P/E

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

Our examination of Shanghai Pharmaceuticals Holding's analyst forecasts revealed that its market-matching earnings outlook isn't contributing to its P/E as much as we would have predicted. There could be some unobserved threats to earnings preventing the P/E ratio from matching the outlook. It appears some are indeed anticipating earnings instability, because these conditions should normally provide more support to the share price.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Shanghai Pharmaceuticals Holding that you should be aware of.

Of course, you might also be able to find a better stock than Shanghai Pharmaceuticals Holding. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.