Shenzhen Kangtai Biological Products Co., Ltd.'s (SZSE:300601) Share Price Matching Investor Opinion

Shenzhen Kangtai Biological Products Co., Ltd.'s (SZSE:300601) price-to-earnings (or "P/E") ratio of 74.3x might make it look like a strong sell right now compared to the market in China, where around half of the companies have P/E ratios below 29x and even P/E's below 18x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

Shenzhen Kangtai Biological Products has been struggling lately as its earnings have declined faster than most other companies. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Shenzhen Kangtai Biological Products

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Shenzhen Kangtai Biological Products.

Does Growth Match The High P/E?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Shenzhen Kangtai Biological Products' to be considered reasonable.

Retrospectively, the last year delivered a frustrating 43% 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 42% 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.

Shifting to the future, estimates from the twelve analysts covering the company suggest earnings should grow by 342% over the next year. Meanwhile, the rest of the market is forecast to only expand by 41%, which is noticeably less attractive.

In light of this, it's understandable that Shenzhen Kangtai Biological Products' 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 Final Word

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 Shenzhen Kangtai Biological Products' 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.

Plus, you should also learn about these 2 warning signs we've spotted with Shenzhen Kangtai Biological Products.

You might be able to find a better investment than Shenzhen Kangtai Biological Products. 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.