Some Shareholders Feeling Restless Over Tianjin Pharmaceutical Da Ren Tang Group Corporation Limited's (SHSE:600329) P/E Ratio

With a median price-to-earnings (or "P/E") ratio of close to 27x in China, you could be forgiven for feeling indifferent about Tianjin Pharmaceutical Da Ren Tang Group Corporation Limited's (SHSE:600329) P/E ratio of 25.5x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

While the market has experienced earnings growth lately, Tianjin Pharmaceutical Da Ren Tang Group's earnings have gone into reverse gear, which is not great. It might be that many expect the dour earnings performance to strengthen positively, which has kept the P/E from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.

See our latest analysis for Tianjin Pharmaceutical Da Ren Tang Group

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Is There Some Growth For Tianjin Pharmaceutical Da Ren Tang Group?

In order to justify its P/E ratio, Tianjin Pharmaceutical Da Ren Tang Group would need to produce growth that's similar to the market.

Retrospectively, the last year delivered a frustrating 8.6% decrease to the company's bottom line. Still, the latest three year period has seen an excellent 37% overall rise in EPS, in spite of its unsatisfying short-term performance. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Turning to the outlook, the next three years should generate growth of 18% each year as estimated by the three analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 24% per annum, which is noticeably more attractive.

With this information, we find it interesting that Tianjin Pharmaceutical Da Ren Tang Group is trading at a fairly similar P/E to the market. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Bottom Line On Tianjin Pharmaceutical Da Ren Tang Group'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 Tianjin Pharmaceutical Da Ren Tang Group currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

You always need to take note of risks, for example - Tianjin Pharmaceutical Da Ren Tang Group has 1 warning sign we think you should be aware of.

You might be able to find a better investment than Tianjin Pharmaceutical Da Ren Tang Group. 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).

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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