ChengDa Pharmaceuticals Co., Ltd.'s (SZSE:301201) 42% Price Boost Is Out Of Tune With Earnings

ChengDa Pharmaceuticals Co., Ltd. (SZSE:301201) shareholders have had their patience rewarded with a 42% share price jump in the last month. While recent buyers may be laughing, long-term holders might not be as pleased since the recent gain only brings the stock back to where it started a year ago.

Since its price has surged higher, given around half the companies in China have price-to-earnings ratios (or "P/E's") below 33x, you may consider ChengDa Pharmaceuticals as a stock to potentially avoid with its 43.1x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

ChengDa Pharmaceuticals has been doing a good job lately as it's been growing earnings at a solid pace. It might be that many expect the respectable earnings performance to beat most other companies over the coming period, 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 ChengDa Pharmaceuticals

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 ChengDa Pharmaceuticals' earnings, revenue and cash flow.

How Is ChengDa Pharmaceuticals' Growth Trending?

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

Retrospectively, the last year delivered an exceptional 24% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen a very unpleasant 47% drop in EPS in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Comparing that to the market, which is predicted to deliver 37% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

With this information, we find it concerning that ChengDa Pharmaceuticals is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

The Key Takeaway

ChengDa Pharmaceuticals' P/E is getting right up there since its shares have risen strongly. 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.

We've established that ChengDa Pharmaceuticals currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Plus, you should also learn about these 3 warning signs we've spotted with ChengDa Pharmaceuticals (including 2 which shouldn't be ignored).

If these risks are making you reconsider your opinion on ChengDa Pharmaceuticals, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.