Gansu Longshenrongfa Pharmaceutical Industry CO.,LTD (SZSE:300534) Looks Just Right With A 26% Price Jump

Gansu Longshenrongfa Pharmaceutical Industry CO.,LTD (SZSE:300534) shares have had a really impressive month, gaining 26% after a shaky period beforehand. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 7.8% in the last twelve months.

Following the firm bounce in price, Gansu Longshenrongfa Pharmaceutical IndustryLTD may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 54.9x, since almost half of all companies in China have P/E ratios under 33x and even P/E's lower than 20x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

For instance, Gansu Longshenrongfa Pharmaceutical IndustryLTD'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 Gansu Longshenrongfa Pharmaceutical IndustryLTD

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 Gansu Longshenrongfa Pharmaceutical IndustryLTD's earnings, revenue and cash flow.

How Is Gansu Longshenrongfa Pharmaceutical IndustryLTD's Growth Trending?

Gansu Longshenrongfa Pharmaceutical IndustryLTD's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

Retrospectively, the last year delivered a frustrating 19% decrease to the company's bottom line. Even so, admirably EPS has lifted 298% in aggregate from three years ago, notwithstanding the last 12 months. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

This is in contrast to the rest of the market, which is expected to grow by 36% over the next year, materially lower than the company's recent medium-term annualised growth rates.

With this information, we can see why Gansu Longshenrongfa Pharmaceutical IndustryLTD is trading at such a high P/E compared to the market. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

The Key Takeaway

Gansu Longshenrongfa Pharmaceutical IndustryLTD's P/E is flying high just like its stock has during the last month. 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.

We've established that Gansu Longshenrongfa Pharmaceutical IndustryLTD maintains its high P/E on the strength of its recent three-year growth being higher than the wider market forecast, 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. Unless the recent medium-term conditions change, they will continue to provide strong support to the share price.

A lot of potential risks can sit within a company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Gansu Longshenrongfa Pharmaceutical IndustryLTD with six simple checks.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and 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.