There's Reason For Concern Over Hainan Huluwa Pharmaceutical Group Co., Ltd.'s (SHSE:605199) Massive 27% Price Jump

The Hainan Huluwa Pharmaceutical Group Co., Ltd. (SHSE:605199) share price has done very well over the last month, posting an excellent gain of 27%. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 19% over that time.

Since its price has surged higher, Hainan Huluwa Pharmaceutical Group's price-to-earnings (or "P/E") ratio of 39x might 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 27x and even P/E's below 16x are quite common. 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. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View 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?

There's an inherent assumption that a company should outperform the market for P/E ratios like Hainan Huluwa Pharmaceutical Group's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 46% last year. 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. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. 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.

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

Hainan Huluwa Pharmaceutical Group shares have received a push in the right direction, but its P/E is elevated too. 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 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.

We don't want to rain on the parade too much, but we did also find 5 warning signs for Hainan Huluwa Pharmaceutical Group (2 are a bit unpleasant!) that you need to be mindful of.

If you're unsure about the strength of Hainan Huluwa Pharmaceutical Group'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.