There wouldn't be many who think Sinocare Inc.'s (SZSE:300298) price-to-earnings (or "P/E") ratio of 30.5x is worth a mention when the median P/E in China is similar at about 29x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.
With earnings growth that's superior to most other companies of late, Sinocare has been doing relatively well. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. 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 not quite in favour.
Check out our latest analysis for Sinocare
Does Growth Match The P/E?
There's an inherent assumption that a company should be matching the market for P/E ratios like Sinocare's to be considered reasonable.
Taking a look back first, we see that the company grew earnings per share by an impressive 23% last year. The latest three year period has also seen a 28% overall rise in EPS, aided extensively by its short-term performance. So we can start by confirming that the company has actually done a good job of growing earnings over that time.
Turning to the outlook, the next year should generate growth of 32% as estimated by the four analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 36%, which is not materially different.
In light of this, it's understandable that Sinocare's P/E sits in line with the majority of other companies. It seems most investors are expecting to see average future growth and are only willing to pay a moderate amount for the stock.
The Key Takeaway
Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.
As we suspected, our examination of Sinocare's analyst forecasts revealed that its market-matching earnings outlook is contributing to its current P/E. At this stage investors feel the potential for an improvement or deterioration in earnings isn't great enough to justify a high or low P/E ratio. Unless these conditions change, they will continue to support the share price at these levels.
We don't want to rain on the parade too much, but we did also find 1 warning sign for Sinocare that you need to be mindful 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.
About SZSE:300298
Sinocare
Engages in the development, manufacture, and marketing of rapid diagnosis testing products primarily in the People’s Republic of China.
Excellent balance sheet average dividend payer.
