Hainan Huluwa Pharmaceutical Group Co., Ltd.'s (SHSE:605199) 43% Share Price Surge Not Quite Adding Up

Hainan Huluwa Pharmaceutical Group Co., Ltd. (SHSE:605199) shares have continued their recent momentum with a 43% gain in the last month alone. Notwithstanding the latest gain, the annual share price return of 5.3% isn't as impressive.

Following the firm bounce in price, given close to half the companies in China have price-to-earnings ratios (or "P/E's") below 35x, you may consider Hainan Huluwa Pharmaceutical Group as a stock to avoid entirely with its 67x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's exceedingly strong of late, Hainan Huluwa Pharmaceutical Group has been doing very well. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, 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.

See our latest analysis for Hainan Huluwa Pharmaceutical Group

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Hainan Huluwa Pharmaceutical Group's earnings, revenue and cash flow.

Does Growth Match The High P/E?

Hainan Huluwa Pharmaceutical Group's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

Retrospectively, the last year delivered an exceptional 32% gain to the company's bottom line. Still, incredibly EPS has fallen 8.0% in total from three years ago, which is quite disappointing. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

In contrast to the company, the rest of the market is expected to grow by 39% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

In light of this, it's alarming that Hainan Huluwa Pharmaceutical Group's P/E sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

The Final Word

The strong share price surge has got Hainan Huluwa Pharmaceutical Group's P/E rushing to great heights as well. 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 Hainan Huluwa Pharmaceutical Group revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Before you take the next step, you should know about the 4 warning signs for Hainan Huluwa Pharmaceutical Group (2 are a bit unpleasant!) that we have uncovered.

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).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.