Some Confidence Is Lacking In Guangzhou LBP Medicine Science & Technology Co., Ltd. (SHSE:688393) As Shares Slide 25%

Guangzhou LBP Medicine Science & Technology Co., Ltd. (SHSE:688393) shares have had a horrible month, losing 25% after a relatively good period beforehand. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 34% in that time.

Although its price has dipped substantially, Guangzhou LBP Medicine Science & Technology may still be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 38.5x, since almost half of all companies in China have P/E ratios under 29x and even P/E's lower than 18x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

For instance, Guangzhou LBP Medicine Science & Technology's receding earnings in recent times would have to be some food for thought. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Guangzhou LBP Medicine Science & Technology

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Guangzhou LBP Medicine Science & Technology will help you shine a light on its historical performance.

How Is Guangzhou LBP Medicine Science & Technology's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as high as Guangzhou LBP Medicine Science & Technology's is when the company's growth is on track to outshine the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 6.5%. As a result, earnings from three years ago have also fallen 60% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

In contrast to the company, the rest of the market is expected to grow by 35% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

With this information, we find it concerning that Guangzhou LBP Medicine Science & Technology is trading at a P/E higher than the market. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

The Key Takeaway

Despite the recent share price weakness, Guangzhou LBP Medicine Science & Technology's P/E remains higher than most other companies. 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.

We've established that Guangzhou LBP Medicine Science & Technology currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

You should always think about risks. Case in point, we've spotted 3 warning signs for Guangzhou LBP Medicine Science & Technology you should be aware of, and 1 of them shouldn't be ignored.

If you're unsure about the strength of Guangzhou LBP Medicine Science & Technology's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.