Earnings Tell The Story For Guiyang Xintian Pharmaceutical Co.,Ltd. (SZSE:002873) As Its Stock Soars 25%

Guiyang Xintian Pharmaceutical Co.,Ltd. (SZSE:002873) shares have had a really impressive month, gaining 25% after a shaky period beforehand. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 22% in the last twelve months.

After such a large jump in price, given around half the companies in China have price-to-earnings ratios (or "P/E's") below 29x, you may consider Guiyang Xintian PharmaceuticalLtd as a stock to potentially avoid with its 33.2x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

Recent times haven't been advantageous for Guiyang Xintian PharmaceuticalLtd as its earnings have been falling quicker than most other companies. It might be that many expect the dismal earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Guiyang Xintian PharmaceuticalLtd

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Guiyang Xintian PharmaceuticalLtd.

Does Growth Match The High P/E?

There's an inherent assumption that a company should outperform the market for P/E ratios like Guiyang Xintian PharmaceuticalLtd's to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 35%. This means it has also seen a slide in earnings over the longer-term as EPS is down 30% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 27% per annum during the coming three years according to the sole analyst following the company. With the market only predicted to deliver 19% each year, the company is positioned for a stronger earnings result.

With this information, we can see why Guiyang Xintian PharmaceuticalLtd is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What We Can Learn From Guiyang Xintian PharmaceuticalLtd's P/E?

Guiyang Xintian PharmaceuticalLtd shares have received a push in the right direction, but its P/E is elevated too. 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.

As we suspected, our examination of Guiyang Xintian PharmaceuticalLtd's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 3 warning signs for Guiyang Xintian PharmaceuticalLtd you should be aware of, and 1 of them is significant.

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.