Shanghai Allist Pharmaceuticals Co., Ltd. (SHSE:688578) Stock Rockets 34% As Investors Are Less Pessimistic Than Expected

Despite an already strong run, Shanghai Allist Pharmaceuticals Co., Ltd. (SHSE:688578) shares have been powering on, with a gain of 34% in the last thirty days. The annual gain comes to 104% following the latest surge, making investors sit up and take notice.

Although its price has surged higher, it's still not a stretch to say that Shanghai Allist Pharmaceuticals' price-to-earnings (or "P/E") ratio of 30.5x right now seems quite "middle-of-the-road" compared to the market in China, where the median P/E ratio is around 32x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

Shanghai Allist Pharmaceuticals certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

See our latest analysis for Shanghai Allist Pharmaceuticals

Keen to find out how analysts think Shanghai Allist Pharmaceuticals' future stacks up against the industry? In that case, our free report is a great place to start.

Does Growth Match The P/E?

Shanghai Allist Pharmaceuticals' P/E ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the market.

If we review the last year of earnings growth, the company posted a terrific increase of 378%. Still, EPS has barely risen at all from three years ago in total, which is not ideal. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Shifting to the future, estimates from the three analysts covering the company suggest earnings growth is heading into negative territory, declining 7.2% over the next year. With the market predicted to deliver 38% growth , that's a disappointing outcome.

In light of this, it's somewhat alarming that Shanghai Allist Pharmaceuticals' P/E sits in line with 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 right now. Only the boldest would assume these prices are sustainable as these declining earnings are likely to weigh on the share price eventually.

The Final Word

Shanghai Allist Pharmaceuticals' stock has a lot of momentum behind it lately, which has brought its P/E level with the market. 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.

We've established that Shanghai Allist Pharmaceuticals currently trades on a higher than expected P/E for a company whose earnings are forecast to decline. When we see a poor outlook with earnings heading backwards, we suspect share price is at risk of declining, sending the moderate P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

The company's balance sheet is another key area for risk analysis. You can assess many of the main risks through our free balance sheet analysis for Shanghai Allist Pharmaceuticals with six simple checks.

If you're unsure about the strength of Shanghai Allist Pharmaceuticals' 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.