Sansure Biotech Inc.'s (SHSE:688289) 39% Price Boost Is Out Of Tune With Earnings

Sansure Biotech Inc. (SHSE:688289) shareholders have had their patience rewarded with a 39% share price jump in the last month. Looking back a bit further, it's encouraging to see the stock is up 48% in the last year.

In spite of the firm bounce in price, it's still not a stretch to say that Sansure Biotech's price-to-earnings (or "P/E") ratio of 31.6x right now seems quite "middle-of-the-road" compared to the market in China, where the median P/E ratio is around 34x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

With earnings that are retreating more than the market's of late, Sansure Biotech has been very sluggish. It might be that many expect the dismal earnings performance to revert back to market averages soon, which has kept the P/E from falling. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. Or at the very least, you'd be hoping it doesn't keep underperforming if your plan is to pick up some stock while it's not in favour.

Check out our latest analysis for Sansure Biotech

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How Is Sansure Biotech's Growth Trending?

In order to justify its P/E ratio, Sansure Biotech would need to produce growth that's similar to the market.

Retrospectively, the last year delivered a frustrating 53% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 83% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Turning to the outlook, the next three years should generate growth of 11% each year as estimated by the sole analyst watching the company. That's shaping up to be materially lower than the 19% each year growth forecast for the broader market.

In light of this, it's curious that Sansure Biotech's P/E sits in line with the majority of other companies. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.

The Bottom Line On Sansure Biotech's P/E

Sansure Biotech's stock has a lot of momentum behind it lately, which has brought its P/E level with the market. 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 Sansure Biotech's analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E as much as we would have predicted. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Sansure Biotech (at least 1 which doesn't sit too well with us), and understanding these should be part of your investment process.

Of course, you might also be able to find a better stock than Sansure Biotech. 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.