Stock Analysis

Optimistic Investors Push Hunan Dajiaweikang Pharmaceutical Industry Co.,Ltd (SZSE:301126) Shares Up 30% But Growth Is Lacking

SZSE:301126
Source: Shutterstock

Hunan Dajiaweikang Pharmaceutical Industry Co.,Ltd (SZSE:301126) shares have continued their recent momentum with a 30% gain in the last month alone. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 12% in the last twelve months.

After such a large jump in price, given close to half the companies in China have price-to-earnings ratios (or "P/E's") below 32x, you may consider Hunan Dajiaweikang Pharmaceutical IndustryLtd as a stock to avoid entirely with its 66.3x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

For instance, Hunan Dajiaweikang Pharmaceutical IndustryLtd'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. If not, then existing shareholders may be quite nervous about the viability of the share price.

View our latest analysis for Hunan Dajiaweikang Pharmaceutical IndustryLtd

pe-multiple-vs-industry
SZSE:301126 Price to Earnings Ratio vs Industry May 9th 2024
Although there are no analyst estimates available for Hunan Dajiaweikang Pharmaceutical IndustryLtd, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Is There Enough Growth For Hunan Dajiaweikang Pharmaceutical IndustryLtd?

In order to justify its P/E ratio, Hunan Dajiaweikang Pharmaceutical IndustryLtd would need to produce outstanding growth well in excess of the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 17%. As a result, earnings from three years ago have also fallen 64% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

In contrast to the company, the rest of the market is expected to grow by 38% 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 Hunan Dajiaweikang Pharmaceutical IndustryLtd 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. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Key Takeaway

Hunan Dajiaweikang Pharmaceutical IndustryLtd's P/E is flying high just like its stock has during the last month. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Hunan Dajiaweikang Pharmaceutical IndustryLtd currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Plus, you should also learn about these 4 warning signs we've spotted with Hunan Dajiaweikang Pharmaceutical IndustryLtd (including 2 which don't sit too well with us).

You might be able to find a better investment than Hunan Dajiaweikang Pharmaceutical IndustryLtd. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

Valuation is complex, but we're helping make it simple.

Find out whether Hunan Dajiaweikang Pharmaceutical IndustryLtd is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.