Market Might Still Lack Some Conviction On Dalian BIO-CHEM Company Limited (SHSE:603360) Even After 29% Share Price Boost

The Dalian BIO-CHEM Company Limited (SHSE:603360) share price has done very well over the last month, posting an excellent gain of 29%. The last month tops off a massive increase of 104% in the last year.

Although its price has surged higher, Dalian BIO-CHEM may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 25.5x, since almost half of all companies in China have P/E ratios greater than 30x and even P/E's higher than 58x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Dalian BIO-CHEM has been struggling lately as its earnings have declined faster than most other companies. The P/E is probably low because investors think this poor earnings performance isn't going to improve at all. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. If not, then existing shareholders will probably struggle to get excited about the future direction of the share price.

See our latest analysis for Dalian BIO-CHEM

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Dalian BIO-CHEM.

What Are Growth Metrics Telling Us About The Low P/E?

There's an inherent assumption that a company should underperform the market for P/E ratios like Dalian BIO-CHEM's to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 16%. Even so, admirably EPS has lifted 45% in aggregate from three years ago, notwithstanding the last 12 months. 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.

Shifting to the future, estimates from the only analyst covering the company suggest earnings should grow by 47% over the next year. Meanwhile, the rest of the market is forecast to only expand by 36%, which is noticeably less attractive.

With this information, we find it odd that Dalian BIO-CHEM is trading at a P/E lower than the market. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

What We Can Learn From Dalian BIO-CHEM's P/E?

The latest share price surge wasn't enough to lift Dalian BIO-CHEM's P/E close to the market median. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of Dalian BIO-CHEM's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E anywhere near as much as we would have predicted. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.

Before you settle on your opinion, we've discovered 1 warning sign for Dalian BIO-CHEM that you should be aware of.

You might be able to find a better investment than Dalian BIO-CHEM. 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).

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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.