Beijing Tiantan Biological Products Co., Ltd.'s (SHSE:600161) Shares May Have Run Too Fast Too Soon

With a price-to-earnings (or "P/E") ratio of 32.6x Beijing Tiantan Biological Products Co., Ltd. (SHSE:600161) may be sending bearish signals at the moment, given that almost half of all companies in China have P/E ratios under 25x and even P/E's lower than 15x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Beijing Tiantan Biological Products has been doing quite well of late. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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Does Growth Match The High P/E?

The only time you'd be truly comfortable seeing a P/E as high as Beijing Tiantan Biological Products' is when the company's growth is on track to outshine the market.

Retrospectively, the last year delivered an exceptional 19% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 70% in total over the last three years. 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 17% per year as estimated by the ten analysts watching the company. That's shaping up to be materially lower than the 19% per annum growth forecast for the broader market.

In light of this, it's alarming that Beijing Tiantan Biological Products' P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

The Final Word

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of Beijing Tiantan Biological Products' analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for Beijing Tiantan Biological Products with six simple checks will allow you to discover any risks that could be an issue.

If these risks are making you reconsider your opinion on Beijing Tiantan Biological Products, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.