Yantai Dongcheng Pharmaceutical Group Co.,Ltd.'s (SZSE:002675) Business Is Yet to Catch Up With Its Share Price

With a price-to-earnings (or "P/E") ratio of 45.1x Yantai Dongcheng Pharmaceutical Group Co.,Ltd. (SZSE:002675) may be sending very bearish signals at the moment, given that almost half of all companies in China have P/E ratios under 28x and even P/E's lower than 17x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Yantai Dongcheng Pharmaceutical GroupLtd could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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Does Growth Match The High P/E?

In order to justify its P/E ratio, Yantai Dongcheng Pharmaceutical GroupLtd would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered a frustrating 27% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 47% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Looking ahead now, EPS is anticipated to climb by 24% per annum during the coming three years according to the five analysts following the company. That's shaping up to be similar to the 25% per annum growth forecast for the broader market.

In light of this, it's curious that Yantai Dongcheng Pharmaceutical GroupLtd's P/E sits above the majority of other companies. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

The Key Takeaway

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of Yantai Dongcheng Pharmaceutical GroupLtd's analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

Before you take the next step, you should know about the 1 warning sign for Yantai Dongcheng Pharmaceutical GroupLtd that we have uncovered.

If these risks are making you reconsider your opinion on Yantai Dongcheng Pharmaceutical GroupLtd, 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.

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