Hubei Jumpcan Pharmaceutical Co., Ltd.'s (SHSE:600566) Prospects Need A Boost To Lift Shares

With a price-to-earnings (or "P/E") ratio of 11.7x Hubei Jumpcan Pharmaceutical Co., Ltd. (SHSE:600566) may be sending very bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 32x and even P/E's higher than 60x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

With earnings growth that's superior to most other companies of late, Hubei Jumpcan Pharmaceutical has been doing relatively well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

View our latest analysis for Hubei Jumpcan Pharmaceutical

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

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

If we review the last year of earnings growth, the company posted a terrific increase of 29%. The strong recent performance means it was also able to grow EPS by 121% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the four analysts covering the company suggest earnings should grow by 6.8% per year over the next three years. That's shaping up to be materially lower than the 25% per year growth forecast for the broader market.

With this information, we can see why Hubei Jumpcan 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 Bottom Line On Hubei Jumpcan Pharmaceutical's P/E

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Hubei Jumpcan Pharmaceutical's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

Having said that, be aware Hubei Jumpcan Pharmaceutical is showing 1 warning sign in our investment analysis, you should know about.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and 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.