Anhui Huangshan Capsule Co., Ltd.'s (SZSE:002817) 26% Price Boost Is Out Of Tune With Earnings

Anhui Huangshan Capsule Co., Ltd. (SZSE:002817) shareholders are no doubt pleased to see that the share price has bounced 26% in the last month, although it is still struggling to make up recently lost ground. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 28% in the last twelve months.

In spite of the firm bounce in price, it's still not a stretch to say that Anhui Huangshan Capsule's price-to-earnings (or "P/E") ratio of 27.9x right now seems quite "middle-of-the-road" compared to the market in China, where the median P/E ratio is around 30x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

The recent earnings growth at Anhui Huangshan Capsule would have to be considered satisfactory if not spectacular. One possibility is that the P/E is moderate because investors think this good earnings growth might only be parallel to the broader market in the near future. 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 Huangshan Capsule

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 Anhui Huangshan Capsule's earnings, revenue and cash flow.

Is There Some Growth For Anhui Huangshan Capsule?

The only time you'd be comfortable seeing a P/E like Anhui Huangshan Capsule's is when the company's growth is tracking the market closely.

If we review the last year of earnings growth, the company posted a worthy increase of 6.3%. The latest three year period has also seen an excellent 58% overall rise in EPS, aided somewhat by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 41% shows it's noticeably less attractive on an annualised basis.

In light of this, it's curious that Anhui Huangshan Capsule's P/E sits in line with the majority of other companies. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. They may be setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Final Word

Its shares have lifted substantially and now Anhui Huangshan Capsule's P/E is also back up 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.

We've established that Anhui Huangshan Capsule currently trades on a higher than expected P/E since its recent three-year growth is lower than the wider market forecast. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.

It is also worth noting that we have found 2 warning signs for Anhui Huangshan Capsule that you need to take into consideration.

You might be able to find a better investment than Anhui Huangshan Capsule. 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).

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.