Zhejiang Wolwo Bio-Pharmaceutical Co., Ltd.'s (SZSE:300357) P/E Is Still On The Mark Following 39% Share Price Bounce

Zhejiang Wolwo Bio-Pharmaceutical Co., Ltd. (SZSE:300357) shares have had a really impressive month, gaining 39% after a shaky period beforehand. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 18% in the last twelve months.

Since its price has surged higher, given around half the companies in China have price-to-earnings ratios (or "P/E's") below 29x, you may consider Zhejiang Wolwo Bio-Pharmaceutical as a stock to potentially avoid with its 41x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

The recently shrinking earnings for Zhejiang Wolwo Bio-Pharmaceutical have been in line with the market. One possibility is that the P/E is high because investors think the company can turn things around and break free from the broader downward trend in earnings. If not, then existing shareholders may be a little nervous about the viability of the share price.

View our latest analysis for Zhejiang Wolwo Bio-Pharmaceutical

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Zhejiang Wolwo Bio-Pharmaceutical.

Is There Enough Growth For Zhejiang Wolwo Bio-Pharmaceutical?

The only time you'd be truly comfortable seeing a P/E as high as Zhejiang Wolwo Bio-Pharmaceutical's is when the company's growth is on track to outshine the market.

Retrospectively, the last year delivered a frustrating 1.7% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 2.5% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Turning to the outlook, the next three years should generate growth of 23% per annum as estimated by the four analysts watching the company. That's shaping up to be materially higher than the 19% per annum growth forecast for the broader market.

In light of this, it's understandable that Zhejiang Wolwo Bio-Pharmaceutical's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

Zhejiang Wolwo Bio-Pharmaceutical shares have received a push in the right direction, but its P/E is elevated too. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of Zhejiang Wolwo Bio-Pharmaceutical's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Zhejiang Wolwo Bio-Pharmaceutical, and understanding them should be part of your investment process.

You might be able to find a better investment than Zhejiang Wolwo Bio-Pharmaceutical. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.