Earnings Not Telling The Story For Zhejiang Xinguang Pharmaceutical Co., Ltd. (SZSE:300519) After Shares Rise 38%

The Zhejiang Xinguang Pharmaceutical Co., Ltd. (SZSE:300519) share price has done very well over the last month, posting an excellent gain of 38%. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 3.2% in the last twelve months.

After such a large jump in price, Zhejiang Xinguang Pharmaceutical's price-to-earnings (or "P/E") ratio of 45x might make it look like a sell right now compared to the market in China, where around half of the companies have P/E ratios below 31x and even P/E's below 18x are quite common. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

For instance, Zhejiang Xinguang Pharmaceutical's receding earnings in recent times would have to be some food for thought. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.

See our latest analysis for Zhejiang Xinguang 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 Zhejiang Xinguang Pharmaceutical's earnings, revenue and cash flow.

How Is Zhejiang Xinguang Pharmaceutical's Growth Trending?

Zhejiang Xinguang Pharmaceutical's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 41%. As a result, earnings from three years ago have also fallen 53% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

In contrast to the company, the rest of the market is expected to grow by 37% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

With this information, we find it concerning that Zhejiang Xinguang Pharmaceutical is trading at a P/E higher than the market. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

The Key Takeaway

Zhejiang Xinguang Pharmaceutical's P/E is getting right up there since its shares have risen strongly. 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.

Our examination of Zhejiang Xinguang 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. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

It is also worth noting that we have found 3 warning signs for Zhejiang Xinguang Pharmaceutical that you need to take into consideration.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.