Henan Lingrui Pharmaceutical Co., Ltd. (SHSE:600285) Surges 33% Yet Its Low P/E Is No Reason For Excitement

Henan Lingrui Pharmaceutical Co., Ltd. (SHSE:600285) shares have had a really impressive month, gaining 33% after a shaky period beforehand. The last 30 days bring the annual gain to a very sharp 44%.

Although its price has surged higher, Henan Lingrui Pharmaceutical may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 21.1x, since almost half of all companies in China have P/E ratios greater than 32x and even P/E's higher than 61x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

Recent times have been pleasing for Henan Lingrui Pharmaceutical as its earnings have risen in spite of the market's earnings going into reverse. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. 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 out of favour.

Check out our latest analysis for Henan Lingrui Pharmaceutical

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Is There Any Growth For Henan Lingrui Pharmaceutical?

There's an inherent assumption that a company should underperform the market for P/E ratios like Henan Lingrui Pharmaceutical's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 30% last year. Pleasingly, EPS has also lifted 81% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Shifting to the future, estimates from the three analysts covering the company suggest earnings should grow by 12% per annum over the next three years. That's shaping up to be materially lower than the 19% per year growth forecast for the broader market.

In light of this, it's understandable that Henan Lingrui Pharmaceutical's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Final Word

Despite Henan Lingrui Pharmaceutical's shares building up a head of steam, its P/E still lags most other companies. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Henan Lingrui Pharmaceutical maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Henan Lingrui Pharmaceutical that you should be aware of.

If you're unsure about the strength of Henan Lingrui Pharmaceutical'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.