Fuan Pharmaceutical (Group) Co., Ltd. (SZSE:300194) Shares Fly 36% But Investors Aren't Buying For Growth

The Fuan Pharmaceutical (Group) Co., Ltd. (SZSE:300194) share price has done very well over the last month, posting an excellent gain of 36%. Looking further back, the 22% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

Although its price has surged higher, Fuan Pharmaceutical (Group)'s price-to-earnings (or "P/E") ratio of 21.6x might still make it look like a buy right now compared to the market in China, where around half of the companies have P/E ratios above 34x and even P/E's above 64x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

For instance, Fuan Pharmaceutical (Group)'s receding earnings in recent times would have to be some food for thought. It might be that many expect the disappointing earnings performance to continue or accelerate, which has repressed the P/E. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

Check out our latest analysis for Fuan Pharmaceutical (Group)

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 Fuan Pharmaceutical (Group)'s earnings, revenue and cash flow.

How Is Fuan Pharmaceutical (Group)'s Growth Trending?

The only time you'd be truly comfortable seeing a P/E as low as Fuan Pharmaceutical (Group)'s is when the company's growth is on track to lag the market.

Retrospectively, the last year delivered a frustrating 4.5% decrease to the company's bottom line. Even so, admirably EPS has lifted 52% in aggregate from three years ago, notwithstanding the last 12 months. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome 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 37% shows it's noticeably less attractive on an annualised basis.

In light of this, it's understandable that Fuan Pharmaceutical (Group)'s P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.

What We Can Learn From Fuan Pharmaceutical (Group)'s P/E?

The latest share price surge wasn't enough to lift Fuan Pharmaceutical (Group)'s P/E close to the market median. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Fuan Pharmaceutical (Group) maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.

Before you settle on your opinion, we've discovered 1 warning sign for Fuan Pharmaceutical (Group) that you should be aware of.

If these risks are making you reconsider your opinion on Fuan Pharmaceutical (Group), 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.