Jiangxi Synergy Pharmaceutical Co., Ltd.'s (SZSE:300636) 41% Share Price Surge Not Quite Adding Up

Jiangxi Synergy Pharmaceutical Co., Ltd. (SZSE:300636) shareholders would be excited to see that the share price has had a great month, posting a 41% gain and recovering from prior weakness. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 24% over that time.

Following the firm bounce in price, given around half the companies in China have price-to-earnings ratios (or "P/E's") below 29x, you may consider Jiangxi Synergy Pharmaceutical as a stock to potentially avoid with its 37.2x 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 as high as it is.

While the market has experienced earnings growth lately, Jiangxi Synergy Pharmaceutical's earnings have gone into reverse gear, which is not great. 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.

View our latest analysis for Jiangxi Synergy Pharmaceutical

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Jiangxi Synergy Pharmaceutical.

How Is Jiangxi Synergy Pharmaceutical's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as high as Jiangxi Synergy Pharmaceutical's is when the company's growth is on track to outshine the market.

Retrospectively, the last year delivered a frustrating 7.8% decrease to the company's bottom line. That put a dampener on the good run it was having over the longer-term as its three-year EPS growth is still a noteworthy 15% in total. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been mostly respectable for the company.

Shifting to the future, estimates from the two analysts covering the company suggest earnings should grow by 25% over the next year. That's shaping up to be materially lower than the 34% growth forecast for the broader market.

With this information, we find it concerning that Jiangxi Synergy Pharmaceutical is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

The Bottom Line On Jiangxi Synergy Pharmaceutical's P/E

The large bounce in Jiangxi Synergy Pharmaceutical's shares has lifted the company's P/E to a fairly high level. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of Jiangxi Synergy Pharmaceutical's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Having said that, be aware Jiangxi Synergy Pharmaceutical is showing 1 warning sign in our investment analysis, you should know about.

Of course, you might also be able to find a better stock than Jiangxi Synergy Pharmaceutical. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.