Guangdong Taienkang Pharmaceutical Co., Ltd.'s (SZSE:301263) P/E Still Appears To Be Reasonable

When close to half the companies in China have price-to-earnings ratios (or "P/E's") below 26x, you may consider Guangdong Taienkang Pharmaceutical Co., Ltd. (SZSE:301263) as a stock to potentially avoid with its 35.3x 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 as high as it is.

While the market has experienced earnings growth lately, Guangdong Taienkang Pharmaceutical's earnings have gone into reverse gear, which is not great. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Guangdong Taienkang Pharmaceutical

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Is There Enough Growth For Guangdong Taienkang Pharmaceutical?

Guangdong Taienkang 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.

Retrospectively, the last year delivered a frustrating 9.4% 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 16% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the sole analyst covering the company suggest earnings should grow by 33% per year over the next three years. That's shaping up to be materially higher than the 23% per year growth forecast for the broader market.

In light of this, it's understandable that Guangdong Taienkang Pharmaceutical's 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

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of Guangdong Taienkang Pharmaceutical'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.

It is also worth noting that we have found 2 warning signs for Guangdong Taienkang Pharmaceutical (1 doesn't sit too well with us!) that you need to take into consideration.

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.