Tonghua Dongbao Pharmaceutical Co., Ltd.'s (SHSE:600867) Earnings Haven't Escaped The Attention Of Investors

When close to half the companies in China have price-to-earnings ratios (or "P/E's") below 29x, you may consider Tonghua Dongbao Pharmaceutical Co., Ltd. (SHSE:600867) as a stock to potentially avoid with its 35.9x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

With earnings that are retreating more than the market's of late, Tonghua Dongbao Pharmaceutical has been very sluggish. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. If not, then existing shareholders may be very nervous about the viability of the share price.

Check out our latest analysis for Tonghua Dongbao Pharmaceutical

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Tonghua Dongbao Pharmaceutical.

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

Tonghua Dongbao Pharmaceutical's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 47%. This means it has also seen a slide in earnings over the longer-term as EPS is down 56% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Looking ahead now, EPS is anticipated to climb by 47% per year during the coming three years according to the seven analysts following the company. That's shaping up to be materially higher than the 19% each year growth forecast for the broader market.

With this information, we can see why Tonghua Dongbao Pharmaceutical is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From Tonghua Dongbao Pharmaceutical's P/E?

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Tonghua Dongbao Pharmaceutical maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

Having said that, be aware Tonghua Dongbao Pharmaceutical is showing 3 warning signs in our investment analysis, and 1 of those is potentially serious.

If you're unsure about the strength of Tonghua Dongbao 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.