Why We're Not Concerned About Jiangsu Hengrui Medicine Co., Ltd.'s (SHSE:600276) Share Price

When close to half the companies in China have price-to-earnings ratios (or "P/E's") below 28x, you may consider Jiangsu Hengrui Medicine Co., Ltd. (SHSE:600276) as a stock to avoid entirely with its 53.8x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's superior to most other companies of late, Jiangsu Hengrui Medicine has been doing relatively well. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Jiangsu Hengrui Medicine

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

Jiangsu Hengrui Medicine's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 15% last year. However, this wasn't enough as the latest three year period has seen an unpleasant 32% overall drop in EPS. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 27% each year over the next three years. With the market only predicted to deliver 25% per annum, the company is positioned for a stronger earnings result.

With this information, we can see why Jiangsu Hengrui Medicine is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What We Can Learn From Jiangsu Hengrui Medicine's P/E?

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Jiangsu Hengrui Medicine maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

A lot of potential risks can sit within a company's balance sheet. Take a look at our free balance sheet analysis for Jiangsu Hengrui Medicine with six simple checks on some of these key factors.

If you're unsure about the strength of Jiangsu Hengrui Medicine's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com