Zhejiang Garden Biopharmaceutical Co.,Ltd.'s (SZSE:300401) Stock Retreats 26% But Earnings Haven't Escaped The Attention Of Investors

Zhejiang Garden Biopharmaceutical Co.,Ltd. (SZSE:300401) shares have retraced a considerable 26% in the last month, reversing a fair amount of their solid recent performance. Indeed, the recent drop has reduced its annual gain to a relatively sedate 6.4% over the last twelve months.

Although its price has dipped substantially, Zhejiang Garden BiopharmaceuticalLtd may still be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 30x, since almost half of all companies in China have P/E ratios under 26x and even P/E's lower than 16x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Zhejiang Garden BiopharmaceuticalLtd certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Zhejiang Garden BiopharmaceuticalLtd

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Is There Enough Growth For Zhejiang Garden BiopharmaceuticalLtd?

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

If we review the last year of earnings growth, the company posted a worthy increase of 9.2%. Ultimately though, it couldn't turn around the poor performance of the prior period, with EPS shrinking 48% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 48% per annum during the coming three years according to the only analyst following the company. With the market only predicted to deliver 20% per year, 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. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From Zhejiang Garden BiopharmaceuticalLtd's P/E?

There's still some solid strength behind Zhejiang Garden BiopharmaceuticalLtd's P/E, if not its share price lately. 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 Zhejiang Garden BiopharmaceuticalLtd'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.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Zhejiang Garden BiopharmaceuticalLtd that you should be aware of.

If these risks are making you reconsider your opinion on Zhejiang Garden BiopharmaceuticalLtd, 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.