Hainan Huluwa Pharmaceutical Group Co., Ltd.'s (SHSE:605199) Shares Climb 27% But Its Business Is Yet to Catch Up

Hainan Huluwa Pharmaceutical Group Co., Ltd. (SHSE:605199) shareholders have had their patience rewarded with a 27% share price jump in the last month. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 19% in the last twelve months.

After such a large jump in price, Hainan Huluwa Pharmaceutical Group may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 39x, since almost half of all companies in China have P/E ratios under 27x and even P/E's lower than 16x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

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.

Check out our latest analysis for Hainan Huluwa Pharmaceutical Group

Although there are no analyst estimates available for Hainan Huluwa Pharmaceutical Group, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

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

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

If we review the last year of earnings growth, the company posted a terrific increase of 46%. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 4.9% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 36% shows it's an unpleasant look.

With this information, we find it concerning that Hainan Huluwa Pharmaceutical Group is trading at a P/E higher than the market. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

What We Can Learn From Hainan Huluwa Pharmaceutical Group's P/E?

Hainan Huluwa Pharmaceutical Group's P/E is getting right up there since its shares have risen strongly. 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.

We've established that Hainan Huluwa Pharmaceutical Group currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

It is also worth noting that we have found 5 warning signs for Hainan Huluwa Pharmaceutical Group (2 are potentially serious!) that you need to take into consideration.

You might be able to find a better investment than Hainan Huluwa Pharmaceutical Group. 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.