More Unpleasant Surprises Could Be In Store For Shandong Keyuan Pharmaceutical Co., Ltd.'s (SZSE:301281) Shares After Tumbling 27%

Shandong Keyuan Pharmaceutical Co., Ltd. (SZSE:301281) shareholders won't be pleased to see that the share price has had a very rough month, dropping 27% and undoing the prior period's positive performance. Longer-term shareholders would now have taken a real hit with the stock declining 4.4% in the last year.

Although its price has dipped substantially, Shandong Keyuan Pharmaceutical's price-to-earnings (or "P/E") ratio of 34x might still make it look like a sell right now compared to the market in China, where around half of the companies have P/E ratios below 29x and even P/E's below 18x are quite common. 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.

For instance, Shandong Keyuan Pharmaceutical's receding earnings in recent times would have to be some food for thought. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.

View our latest analysis for Shandong Keyuan Pharmaceutical

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Shandong Keyuan Pharmaceutical will help you shine a light on its historical performance.

How Is Shandong Keyuan Pharmaceutical's Growth Trending?

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

Retrospectively, the last year delivered a frustrating 32% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 16% in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 36% shows it's an unpleasant look.

In light of this, it's alarming that Shandong Keyuan Pharmaceutical's P/E sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Key Takeaway

There's still some solid strength behind Shandong Keyuan Pharmaceutical's P/E, if not its share price lately. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

Our examination of Shandong Keyuan Pharmaceutical revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. 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.

You need to take note of risks, for example - Shandong Keyuan Pharmaceutical has 3 warning signs (and 1 which is potentially serious) we think you should know about.

Of course, you might also be able to find a better stock than Shandong Keyuan 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.