What You Can Learn From Jiangsu Hualan New Pharmaceutical Material Co.,Ltd.'s (SZSE:301093) P/E

When close to half the companies in China have price-to-earnings ratios (or "P/E's") below 38x, you may consider Jiangsu Hualan New Pharmaceutical Material Co.,Ltd. (SZSE:301093) as a stock to potentially avoid with its 43x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Jiangsu Hualan New Pharmaceutical MaterialLtd has been struggling lately as its earnings have declined faster than most other companies. It might be that many expect the dismal earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be very nervous about the viability of the share price.

See our latest analysis for Jiangsu Hualan New Pharmaceutical MaterialLtd

Keen to find out how analysts think Jiangsu Hualan New Pharmaceutical MaterialLtd's future stacks up against the industry? In that case, our free report is a great place to start.

Does Growth Match The High P/E?

There's an inherent assumption that a company should outperform the market for P/E ratios like Jiangsu Hualan New Pharmaceutical MaterialLtd's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 21% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 69% in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Looking ahead now, EPS is anticipated to climb by 104% during the coming year according to the sole analyst following the company. Meanwhile, the rest of the market is forecast to only expand by 37%, which is noticeably less attractive.

With this information, we can see why Jiangsu Hualan New Pharmaceutical MaterialLtd is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Jiangsu Hualan New Pharmaceutical MaterialLtd's P/E

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.

We've established that Jiangsu Hualan New Pharmaceutical MaterialLtd 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. It's hard to see the share price falling strongly in the near future under these circumstances.

Having said that, be aware Jiangsu Hualan New Pharmaceutical MaterialLtd is showing 2 warning signs in our investment analysis, and 1 of those doesn't sit too well with us.

If you're unsure about the strength of Jiangsu Hualan New Pharmaceutical MaterialLtd'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.