Chengdu Kanghong Pharmaceutical Group Co., Ltd (SZSE:002773) Looks Inexpensive But Perhaps Not Attractive Enough

When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 35x, you may consider Chengdu Kanghong Pharmaceutical Group Co., Ltd (SZSE:002773) as a highly attractive investment with its 14.7x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Chengdu Kanghong Pharmaceutical Group has been doing quite well of late. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

View our latest analysis for Chengdu Kanghong Pharmaceutical Group

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Chengdu Kanghong Pharmaceutical Group.

Is There Any Growth For Chengdu Kanghong Pharmaceutical Group?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Chengdu Kanghong Pharmaceutical Group's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 23% gain to the company's bottom line. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Shifting to the future, estimates from the only analyst covering the company suggest earnings should grow by 17% over the next year. Meanwhile, the rest of the market is forecast to expand by 38%, which is noticeably more attractive.

With this information, we can see why Chengdu Kanghong Pharmaceutical Group is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Final Word

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.

We've established that Chengdu Kanghong Pharmaceutical Group maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

It is also worth noting that we have found 1 warning sign for Chengdu Kanghong Pharmaceutical Group that you need to take into consideration.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.