Harbin Medisan Pharmaceutical Co., Ltd.'s (SZSE:002900) Shares Climb 25% But Its Business Is Yet to Catch Up

The Harbin Medisan Pharmaceutical Co., Ltd. (SZSE:002900) share price has done very well over the last month, posting an excellent gain of 25%. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 17% over that time.

Since its price has surged higher, given close to half the companies in China have price-to-earnings ratios (or "P/E's") below 36x, you may consider Harbin Medisan Pharmaceutical as a stock to avoid entirely with its 65x 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 so lofty.

As an illustration, earnings have deteriorated at Harbin Medisan Pharmaceutical over the last year, which is not ideal at all. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.

Check out our latest analysis for Harbin Medisan Pharmaceutical

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Harbin Medisan Pharmaceutical's earnings, revenue and cash flow.

Does Growth Match The High P/E?

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

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 20%. As a result, earnings from three years ago have also fallen 90% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 41% shows it's an unpleasant look.

With this information, we find it concerning that Harbin Medisan Pharmaceutical is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Bottom Line On Harbin Medisan Pharmaceutical's P/E

Harbin Medisan Pharmaceutical's P/E is flying high just like its stock has during the last month. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of Harbin Medisan Pharmaceutical revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

You should always think about risks. Case in point, we've spotted 3 warning signs for Harbin Medisan Pharmaceutical you should be aware of.

Of course, you might also be able to find a better stock than Harbin Medisan Pharmaceutical. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.