Some Beauty Farm Medical and Health Industry Inc. (HKG:2373) Shareholders Look For Exit As Shares Take 28% Pounding

Unfortunately for some shareholders, the Beauty Farm Medical and Health Industry Inc. (HKG:2373) share price has dived 28% in the last thirty days, prolonging recent pain. Still, a bad month hasn't completely ruined the past year with the stock gaining 31%, which is great even in a bull market.

In spite of the heavy fall in price, Beauty Farm Medical and Health Industry may still be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 17.9x, since almost half of all companies in Hong Kong have P/E ratios under 12x and even P/E's lower than 7x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

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Recent times have been advantageous for Beauty Farm Medical and Health Industry as its earnings have been rising faster than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

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Is There Enough Growth For Beauty Farm Medical and Health Industry?

Beauty Farm Medical and Health Industry'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 an exceptional 23% gain to the company's bottom line. Pleasingly, EPS has also lifted 104% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 15% per annum during the coming three years according to the five analysts following the company. Meanwhile, the rest of the market is forecast to expand by 14% per year, which is not materially different.

In light of this, it's curious that Beauty Farm Medical and Health Industry's P/E sits above the majority of other companies. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

The Bottom Line On Beauty Farm Medical and Health Industry's P/E

Beauty Farm Medical and Health Industry's P/E hasn't come down all the way after its stock plunged. 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.

We've established that Beauty Farm Medical and Health Industry currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

A lot of potential risks can sit within a company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Beauty Farm Medical and Health Industry with six simple checks.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on 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.