Take Care Before Jumping Onto Anhui Huaheng Biotechnology Co., Ltd. (SHSE:688639) Even Though It's 27% Cheaper

Anhui Huaheng Biotechnology Co., Ltd. (SHSE:688639) shareholders won't be pleased to see that the share price has had a very rough month, dropping 27% and undoing the prior period's positive performance. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 17% in that time.

Even after such a large drop in price, there still wouldn't be many who think Anhui Huaheng Biotechnology's price-to-earnings (or "P/E") ratio of 32.1x is worth a mention when the median P/E in China is similar at about 31x. 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, Anhui Huaheng Biotechnology 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.

See our latest analysis for Anhui Huaheng Biotechnology

Want the full picture on analyst estimates for the company? Then our free report on Anhui Huaheng Biotechnology will help you uncover what's on the horizon.

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

There's an inherent assumption that a company should be matching the market for P/E ratios like Anhui Huaheng Biotechnology's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 30%. Pleasingly, EPS has also lifted 184% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 30% each year as estimated by the seven analysts watching the company. That's shaping up to be materially higher than the 25% per year growth forecast for the broader market.

With this information, we find it interesting that Anhui Huaheng Biotechnology is trading at a fairly similar P/E to the market. It may be that most investors aren't convinced the company can achieve future growth expectations.

The Key Takeaway

Following Anhui Huaheng Biotechnology's share price tumble, its P/E is now hanging on to the median market P/E. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Anhui Huaheng Biotechnology's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E 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 pressure on the P/E ratio. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

Before you take the next step, you should know about the 3 warning signs for Anhui Huaheng Biotechnology (2 are a bit unpleasant!) that we have uncovered.

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.

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.