Earnings Not Telling The Story For Hunan Jiudian Pharmaceutical Co., Ltd. (SZSE:300705) After Shares Rise 27%

Hunan Jiudian Pharmaceutical Co., Ltd. (SZSE:300705) shares have had a really impressive month, gaining 27% after a shaky period beforehand. Looking further back, the 19% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

After such a large jump in price, Hunan Jiudian Pharmaceutical may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 33.6x, since almost half of all companies in China have P/E ratios under 30x and even P/E's lower than 18x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Hunan Jiudian Pharmaceutical has been doing quite well of late. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Hunan Jiudian Pharmaceutical

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What Are Growth Metrics Telling Us About The High P/E?

Hunan Jiudian 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 growth, the company posted a terrific increase of 50%. The latest three year period has also seen an excellent 388% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to climb by 24% during the coming year according to the five analysts following the company. With the market predicted to deliver 42% growth , the company is positioned for a weaker earnings result.

In light of this, it's alarming that Hunan Jiudian Pharmaceutical's P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

What We Can Learn From Hunan Jiudian Pharmaceutical's P/E?

The large bounce in Hunan Jiudian Pharmaceutical's shares has lifted the company's P/E to a fairly high level. 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.

We've established that Hunan Jiudian Pharmaceutical currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Plus, you should also learn about these 2 warning signs we've spotted with Hunan Jiudian Pharmaceutical (including 1 which is a bit concerning).

You might be able to find a better investment than Hunan Jiudian Pharmaceutical. 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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