Improved Earnings Required Before Tonghua Dongbao Pharmaceutical Co., Ltd. (SHSE:600867) Shares Find Their Feet

When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 33x, you may consider Tonghua Dongbao Pharmaceutical Co., Ltd. (SHSE:600867) as an attractive investment with its 16.7x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

With earnings growth that's superior to most other companies of late, Tonghua Dongbao 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.

See our latest analysis for Tonghua Dongbao Pharmaceutical

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

The only time you'd be truly comfortable seeing a P/E as low as Tonghua Dongbao Pharmaceutical's is when the company's growth is on track to lag the market.

If we review the last year of earnings growth, the company posted a worthy increase of 13%. EPS has also lifted 17% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 10% per year as estimated by the seven analysts watching the company. With the market predicted to deliver 26% growth per year, the company is positioned for a weaker earnings result.

In light of this, it's understandable that Tonghua Dongbao Pharmaceutical's P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

What We Can Learn From Tonghua Dongbao 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 Tonghua Dongbao Pharmaceutical maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. 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.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Tonghua Dongbao Pharmaceutical you should know about.

If these risks are making you reconsider your opinion on Tonghua Dongbao 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.