Hainan Poly Pharm. Co., Ltd (SZSE:300630) Stocks Shoot Up 28% But Its P/E Still Looks Reasonable

Hainan Poly Pharm. Co., Ltd (SZSE:300630) shareholders would be excited to see that the share price has had a great month, posting a 28% gain and recovering from prior weakness. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 48% in the last twelve months.

Since its price has surged higher, given close to half the companies in China have price-to-earnings ratios (or "P/E's") below 27x, you may consider Hainan Poly Pharm as a stock to avoid entirely with its 54.3x P/E ratio. 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.

Hainan Poly Pharm 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 Hainan Poly Pharm

Keen to find out how analysts think Hainan Poly Pharm's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Hainan Poly Pharm's Growth Trending?

In order to justify its P/E ratio, Hainan Poly Pharm would need to produce outstanding growth well in excess of the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 57%. The last three years don't look nice either as the company has shrunk EPS by 81% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next year should generate growth of 563% as estimated by the watching the company. With the market only predicted to deliver 36%, the company is positioned for a stronger earnings result.

With this information, we can see why Hainan Poly Pharm 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 Hainan Poly Pharm's P/E?

Hainan Poly Pharm's P/E is flying high just like its stock has during the last month. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Hainan Poly Pharm's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

There are also other vital risk factors to consider and we've discovered 4 warning signs for Hainan Poly Pharm (1 can't be ignored!) that you should be aware of before investing here.

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.