Why Investors Shouldn't Be Surprised By Zhejiang Garden Biopharmaceutical Co.,Ltd.'s (SZSE:300401) 27% Share Price Surge

Zhejiang Garden Biopharmaceutical Co.,Ltd. (SZSE:300401) shares have continued their recent momentum with a 27% gain in the last month alone. Looking further back, the 23% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

Since its price has surged higher, given around half the companies in China have price-to-earnings ratios (or "P/E's") below 28x, you may consider Zhejiang Garden BiopharmaceuticalLtd as a stock to potentially avoid with its 32.9x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Zhejiang Garden BiopharmaceuticalLtd could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Zhejiang Garden BiopharmaceuticalLtd

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What Are Growth Metrics Telling Us About The High P/E?

In order to justify its P/E ratio, Zhejiang Garden BiopharmaceuticalLtd would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered a frustrating 16% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 22% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Looking ahead now, EPS is anticipated to climb by 42% each year during the coming three years according to the sole analyst following the company. With the market only predicted to deliver 25% per annum, the company is positioned for a stronger earnings result.

With this information, we can see why Zhejiang Garden BiopharmaceuticalLtd 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.

The Bottom Line On Zhejiang Garden BiopharmaceuticalLtd's P/E

Zhejiang Garden BiopharmaceuticalLtd shares have received a push in the right direction, but its P/E is elevated too. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Zhejiang Garden BiopharmaceuticalLtd maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

You always need to take note of risks, for example - Zhejiang Garden BiopharmaceuticalLtd has 1 warning sign we think you should be aware of.

If you're unsure about the strength of Zhejiang Garden BiopharmaceuticalLtd'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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com