Earnings Not Telling The Story For Shaanxi Panlong Pharmaceutical Group Limited By Share Ltd (SZSE:002864) After Shares Rise 32%

Shaanxi Panlong Pharmaceutical Group Limited By Share Ltd (SZSE:002864) shareholders are no doubt pleased to see that the share price has bounced 32% in the last month, although it is still struggling to make up recently lost ground. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 12% in the last twelve months.

Even after such a large jump in price, there still wouldn't be many who think Shaanxi Panlong Pharmaceutical Group Limited By Share's price-to-earnings (or "P/E") ratio of 31.3x is worth a mention when the median P/E in China is similar at about 30x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

Shaanxi Panlong Pharmaceutical Group Limited By Share has been doing a decent job lately as it's been growing earnings at a reasonable pace. It might be that many expect the respectable earnings performance to only match most other companies over the coming period, which has kept the P/E from rising. If not, then at least existing shareholders probably aren't too pessimistic about the future direction of the share price.

See our latest analysis for Shaanxi Panlong Pharmaceutical Group Limited By Share

Although there are no analyst estimates available for Shaanxi Panlong Pharmaceutical Group Limited By Share, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Does Growth Match The P/E?

Shaanxi Panlong Pharmaceutical Group Limited By Share's 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.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 3.1% last year. EPS has also lifted 10% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 41% shows it's noticeably less attractive on an annualised basis.

In light of this, it's curious that Shaanxi Panlong Pharmaceutical Group Limited By Share's P/E sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. They may be setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Final Word

Shaanxi Panlong Pharmaceutical Group Limited By Share appears to be back in favour with a solid price jump getting its P/E back in line with most other companies. 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 Shaanxi Panlong Pharmaceutical Group Limited By Share currently trades on a higher than expected P/E since its recent three-year growth is lower than the wider market forecast. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless the recent medium-term 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 Shaanxi Panlong Pharmaceutical Group Limited By Share that we have uncovered.

If you're unsure about the strength of Shaanxi Panlong Pharmaceutical Group Limited By Share's 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.