Sunshine Guojian Pharmaceutical (Shanghai) Co., Ltd (SHSE:688336) Held Back By Insufficient Growth Even After Shares Climb 28%

Sunshine Guojian Pharmaceutical (Shanghai) Co., Ltd (SHSE:688336) shares have continued their recent momentum with a 28% gain in the last month alone. Looking further back, the 11% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

In spite of the firm bounce in price, given about half the companies in China have price-to-earnings ratios (or "P/E's") above 40x, you may still consider Sunshine Guojian Pharmaceutical (Shanghai) as an attractive investment with its 24.4x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Sunshine Guojian Pharmaceutical (Shanghai) certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for Sunshine Guojian Pharmaceutical (Shanghai)

Want the full picture on analyst estimates for the company? Then our free report on Sunshine Guojian Pharmaceutical (Shanghai) will help you uncover what's on the horizon.

Is There Any Growth For Sunshine Guojian Pharmaceutical (Shanghai)?

There's an inherent assumption that a company should underperform the market for P/E ratios like Sunshine Guojian Pharmaceutical (Shanghai)'s to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 148%. Pleasingly, EPS has also lifted 3,854% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Shifting to the future, estimates from the four analysts covering the company suggest earnings growth is heading into negative territory, declining 60% over the next year. That's not great when the rest of the market is expected to grow by 37%.

With this information, we are not surprised that Sunshine Guojian Pharmaceutical (Shanghai) is trading at a P/E lower than the market. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Final Word

Despite Sunshine Guojian Pharmaceutical (Shanghai)'s shares building up a head of steam, its P/E still lags most other companies. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

As we suspected, our examination of Sunshine Guojian Pharmaceutical (Shanghai)'s analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

It is also worth noting that we have found 1 warning sign for Sunshine Guojian Pharmaceutical (Shanghai) that you need to take into consideration.

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.