Sichuan Huiyu Pharmaceutical Co., Ltd. (SHSE:688553) Stock Catapults 38% Though Its Price And Business Still Lag The Market

Sichuan Huiyu Pharmaceutical Co., Ltd. (SHSE:688553) shareholders have had their patience rewarded with a 38% share price jump in the last month. Notwithstanding the latest gain, the annual share price return of 5.7% isn't as impressive.

Even after such a large jump in price, Sichuan Huiyu Pharmaceutical's price-to-earnings (or "P/E") ratio of 24.1x might still make it look like a buy right now compared to the market in China, where around half of the companies have P/E ratios above 35x and even P/E's above 67x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Sichuan Huiyu Pharmaceutical certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

See our latest analysis for Sichuan Huiyu Pharmaceutical

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Is There Any Growth For Sichuan Huiyu Pharmaceutical?

Sichuan Huiyu Pharmaceutical's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

Retrospectively, the last year delivered an exceptional 173% gain to the company's bottom line. Still, incredibly EPS has fallen 51% in total from three years ago, which is quite disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Comparing that to the market, which is predicted to deliver 39% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

With this information, we are not surprised that Sichuan Huiyu Pharmaceutical 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 Key Takeaway

Sichuan Huiyu Pharmaceutical's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of Sichuan Huiyu Pharmaceutical revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Sichuan Huiyu Pharmaceutical (at least 1 which is significant), and understanding these should be part of your investment process.

If these risks are making you reconsider your opinion on Sichuan Huiyu Pharmaceutical, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.