Investors Aren't Buying Zhejiang Xianju Pharmaceutical Co.,Ltd.'s (SZSE:002332) Earnings

Zhejiang Xianju Pharmaceutical Co.,Ltd.'s (SZSE:002332) price-to-earnings (or "P/E") ratio of 16x might make it look like a strong buy right now compared to the market in China, where around half of the companies have P/E ratios above 39x and even P/E's above 76x are quite common. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

Recent times haven't been advantageous for Zhejiang Xianju PharmaceuticalLtd as its earnings have been falling quicker than most other companies. The P/E is probably low because investors think this poor earnings performance isn't going to improve at all. You'd much rather the company wasn't bleeding earnings if you still believe in the business. Or at the very least, you'd be hoping the earnings slide doesn't get any worse if your plan is to pick up some stock while it's out of favour.

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How Is Zhejiang Xianju PharmaceuticalLtd's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as depressed as Zhejiang Xianju PharmaceuticalLtd's is when the company's growth is on track to lag the market decidedly.

Retrospectively, the last year delivered a frustrating 10.0% decrease to the company's bottom line. At least EPS has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Shifting to the future, estimates from the nine analysts covering the company suggest earnings should grow by 27% over the next year. That's shaping up to be materially lower than the 37% growth forecast for the broader market.

With this information, we can see why Zhejiang Xianju PharmaceuticalLtd is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Final Word

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Zhejiang Xianju PharmaceuticalLtd's analyst forecasts revealed that its inferior earnings outlook 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. It's hard to see the share price rising strongly in the near future under these circumstances.

Before you settle on your opinion, we've discovered 1 warning sign for Zhejiang Xianju PharmaceuticalLtd that you should be aware of.

If these risks are making you reconsider your opinion on Zhejiang Xianju PharmaceuticalLtd, 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.