Zhangzhou Pientzehuang Pharmaceutical., Ltd's (SHSE:600436) Share Price Could Signal Some Risk

Zhangzhou Pientzehuang Pharmaceutical., Ltd's (SHSE:600436) price-to-earnings (or "P/E") ratio of 46.2x might make it look like a sell right now compared to the market in China, where around half of the companies have P/E ratios below 34x and even P/E's below 20x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Zhangzhou Pientzehuang Pharmaceutical certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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Does Growth Match The High P/E?

In order to justify its P/E ratio, Zhangzhou Pientzehuang Pharmaceutical would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered a decent 8.8% gain to the company's bottom line. The latest three year period has also seen an excellent 31% overall rise in EPS, aided somewhat by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to climb by 15% during the coming year according to the twelve analysts following the company. With the market predicted to deliver 39% growth , the company is positioned for a weaker earnings result.

In light of this, it's alarming that Zhangzhou Pientzehuang Pharmaceutical's P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

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

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Zhangzhou Pientzehuang Pharmaceutical that you should be aware of.

If you're unsure about the strength of Zhangzhou Pientzehuang 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.