Shenzhen YHLO Biotech Co., Ltd.'s (SHSE:688575) Price In Tune With Earnings

When close to half the companies in China have price-to-earnings ratios (or "P/E's") below 26x, you may consider Shenzhen YHLO Biotech Co., Ltd. (SHSE:688575) as a stock to potentially avoid with its 30x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Shenzhen YHLO Biotech hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

View our latest analysis for Shenzhen YHLO Biotech

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Does Growth Match The High P/E?

In order to justify its P/E ratio, Shenzhen YHLO Biotech would need to produce impressive growth in excess of the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 21%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 77% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Looking ahead now, EPS is anticipated to climb by 29% each year during the coming three years according to the seven analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 22% per year, which is noticeably less attractive.

With this information, we can see why Shenzhen YHLO Biotech 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

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Shenzhen YHLO Biotech maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

You should always think about risks. Case in point, we've spotted 1 warning sign for Shenzhen YHLO Biotech you should be aware of.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.