Why Investors Shouldn't Be Surprised By Tianjin Pharmaceutical Da Ren Tang Group Corporation Limited's (SHSE:600329) 36% Share Price Surge

Tianjin Pharmaceutical Da Ren Tang Group Corporation Limited (SHSE:600329) shareholders would be excited to see that the share price has had a great month, posting a 36% gain and recovering from prior weakness. Taking a wider view, although not as strong as the last month, the full year gain of 12% is also fairly reasonable.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about Tianjin Pharmaceutical Da Ren Tang Group's P/E ratio of 31.8x, since the median price-to-earnings (or "P/E") ratio in China is also close to 34x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

Recent times haven't been advantageous for Tianjin Pharmaceutical Da Ren Tang Group as its earnings have been falling quicker than most other companies. One possibility is that the P/E is moderate because investors think the company's earnings trend will eventually fall in line with most others in the market. You'd much rather the company wasn't bleeding earnings if you still believe in the business. 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

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Tianjin Pharmaceutical Da Ren Tang Group.

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

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.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 18%. Regardless, EPS has managed to lift by a handy 15% in aggregate from three years ago, thanks to the earlier period of growth. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been mostly respectable for the company.

Looking ahead now, EPS is anticipated to climb by 21% per year during the coming three years according to the three analysts following the company. Meanwhile, the rest of the market is forecast to expand by 19% per year, which is not materially different.

In light of this, it's understandable that Tianjin Pharmaceutical Da Ren Tang Group's P/E sits in line with the majority of other companies. Apparently shareholders are comfortable to simply hold on while the company is keeping a low profile.

The Bottom Line On Tianjin Pharmaceutical Da Ren Tang Group's P/E

Tianjin Pharmaceutical Da Ren Tang Group appears to be back in favour with a solid price jump getting its P/E back in line with most other companies. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Tianjin Pharmaceutical Da Ren Tang Group's analyst forecasts revealed that its market-matching earnings outlook is contributing to its current P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings won't throw up any surprises. Unless these conditions change, they will continue to support the share price at these levels.

Before you take the next step, you should know about the 1 warning sign for Tianjin Pharmaceutical Da Ren Tang Group that we have uncovered.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.