There's Reason For Concern Over Hunan Dajiaweikang Pharmaceutical Industry Co.,Ltd's (SZSE:301126) Massive 41% Price Jump

The Hunan Dajiaweikang Pharmaceutical Industry Co.,Ltd (SZSE:301126) share price has done very well over the last month, posting an excellent gain of 41%. Notwithstanding the latest gain, the annual share price return of 2.2% isn't as impressive.

Following the firm bounce in price, Hunan Dajiaweikang Pharmaceutical IndustryLtd may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 54.7x, since almost half of all companies in China have P/E ratios under 33x and even P/E's lower than 20x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

Recent times have been quite advantageous for Hunan Dajiaweikang Pharmaceutical IndustryLtd as its earnings have been rising very briskly. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for Hunan Dajiaweikang Pharmaceutical IndustryLtd

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Hunan Dajiaweikang Pharmaceutical IndustryLtd's earnings, revenue and cash flow.

How Is Hunan Dajiaweikang Pharmaceutical IndustryLtd's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as steep as Hunan Dajiaweikang Pharmaceutical IndustryLtd's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered an exceptional 53% gain to the company's bottom line. Still, incredibly EPS has fallen 60% in total from three years ago, which is quite disappointing. 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 37% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

In light of this, it's alarming that Hunan Dajiaweikang Pharmaceutical IndustryLtd's P/E sits above the majority of other companies. 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 Bottom Line On Hunan Dajiaweikang Pharmaceutical IndustryLtd's P/E

The strong share price surge has got Hunan Dajiaweikang Pharmaceutical IndustryLtd's P/E rushing to great heights as well. 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.

Our examination of Hunan Dajiaweikang Pharmaceutical IndustryLtd revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. 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.

There are also other vital risk factors to consider and we've discovered 3 warning signs for Hunan Dajiaweikang Pharmaceutical IndustryLtd (2 are a bit concerning!) that you should be aware of before investing here.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.