Qingdao Vland Biotech INC.'s (SHSE:603739) Popularity With Investors Under Threat As Stock Sinks 26%

The Qingdao Vland Biotech INC. (SHSE:603739) share price has softened a substantial 26% over the previous 30 days, handing back much of the gains the stock has made lately. Indeed, the recent drop has reduced its annual gain to a relatively sedate 4.3% over the last twelve months.

Although its price has dipped substantially, Qingdao Vland Biotech's price-to-earnings (or "P/E") ratio of 41.6x might still 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 29x and even P/E's below 18x 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.

With earnings growth that's superior to most other companies of late, Qingdao Vland Biotech has been doing relatively well. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Qingdao Vland Biotech

Keen to find out how analysts think Qingdao Vland Biotech's future stacks up against the industry? In that case, our free report is a great place to start.

Does Growth Match The High P/E?

There's an inherent assumption that a company should outperform the market for P/E ratios like Qingdao Vland Biotech's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 34% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 37% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Turning to the outlook, the next three years should generate growth of 11% each year as estimated by the three analysts watching the company. With the market predicted to deliver 25% growth per year, the company is positioned for a weaker earnings result.

With this information, we find it concerning that Qingdao Vland Biotech is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. 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.

What We Can Learn From Qingdao Vland Biotech's P/E?

Qingdao Vland Biotech's P/E hasn't come down all the way after its stock plunged. 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.

Our examination of Qingdao Vland Biotech's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. 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. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Qingdao Vland Biotech (of which 1 shouldn't be ignored!) you should know about.

You might be able to find a better investment than Qingdao Vland Biotech. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.