There's Reason For Concern Over Sunshine Guojian Pharmaceutical (Shanghai) Co., Ltd's (SHSE:688336) Massive 30% Price Jump

Sunshine Guojian Pharmaceutical (Shanghai) Co., Ltd (SHSE:688336) shares have had a really impressive month, gaining 30% after a shaky period beforehand. Notwithstanding the latest gain, the annual share price return of 2.1% isn't as impressive.

Following the firm bounce in price, Sunshine Guojian Pharmaceutical (Shanghai) may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 41.3x, since almost half of all companies in China have P/E ratios under 29x and even P/E's lower than 18x 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 its earnings growth in positive territory compared to the declining earnings of most other companies, Sunshine Guojian Pharmaceutical (Shanghai) has been doing quite well of late. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Sunshine Guojian Pharmaceutical (Shanghai)

Keen to find out how analysts think Sunshine Guojian Pharmaceutical (Shanghai)'s future stacks up against the industry? In that case, our free report is a great place to start.

How Is Sunshine Guojian Pharmaceutical (Shanghai)'s Growth Trending?

The only time you'd be truly comfortable seeing a P/E as high as Sunshine Guojian Pharmaceutical (Shanghai)'s is when the company's growth is on track to outshine the market.

If we review the last year of earnings growth, the company posted a terrific increase of 106%. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Shifting to the future, estimates from the three analysts covering the company suggest earnings growth is heading into negative territory, declining 0.4% per year over the next three years. With the market predicted to deliver 19% growth each year, that's a disappointing outcome.

In light of this, it's alarming that Sunshine Guojian Pharmaceutical (Shanghai)'s P/E sits above the majority of other companies. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as these declining earnings are likely to weigh heavily on the share price eventually.

The Bottom Line On Sunshine Guojian Pharmaceutical (Shanghai)'s P/E

Sunshine Guojian Pharmaceutical (Shanghai) 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.

Our examination of Sunshine Guojian Pharmaceutical (Shanghai)'s analyst forecasts revealed that its outlook for shrinking earnings 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 are highly unlikely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Sunshine Guojian Pharmaceutical (Shanghai) (at least 1 which makes us a bit uncomfortable), and understanding them should be part of your investment process.

Of course, you might also be able to find a better stock than Sunshine Guojian Pharmaceutical (Shanghai). So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.