Shanghai Shyndec Pharmaceutical Co., Ltd. (SHSE:600420) Shares Fly 35% But Investors Aren't Buying For Growth

Shanghai Shyndec Pharmaceutical Co., Ltd. (SHSE:600420) shareholders would be excited to see that the share price has had a great month, posting a 35% gain and recovering from prior weakness. Looking back a bit further, it's encouraging to see the stock is up 41% in the last year.

Although its price has surged higher, Shanghai Shyndec Pharmaceutical may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 17.8x, since almost half of all companies in China have P/E ratios greater than 34x and even P/E's higher than 64x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Recent times have been pleasing for Shanghai Shyndec Pharmaceutical as its earnings have risen in spite of the market's earnings going into reverse. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. 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.

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How Is Shanghai Shyndec Pharmaceutical's Growth Trending?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 19% last year. EPS has also lifted 9.0% in aggregate from three years ago, mostly thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

Looking ahead now, EPS is anticipated to climb by 13% per annum during the coming three years according to the only analyst following the company. That's shaping up to be materially lower than the 19% per annum growth forecast for the broader market.

With this information, we can see why Shanghai Shyndec Pharmaceutical is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Final Word

Shanghai Shyndec Pharmaceutical's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of Shanghai Shyndec Pharmaceutical's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

Plus, you should also learn about this 1 warning sign we've spotted with Shanghai Shyndec Pharmaceutical.

If these risks are making you reconsider your opinion on Shanghai Shyndec Pharmaceutical, 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.