With A 30% Price Drop For Beauty Farm Medical and Health Industry Inc. (HKG:2373) You'll Still Get What You Pay For

Beauty Farm Medical and Health Industry Inc. (HKG:2373) shares have had a horrible month, losing 30% after a relatively good period beforehand. Longer-term shareholders will rue the drop in the share price, since it's now virtually flat for the year after a promising few quarters.

In spite of the heavy fall in price, Beauty Farm Medical and Health Industry may still be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 43.6x, since almost half of all companies in Hong Kong have P/E ratios under 9x and even P/E's lower than 5x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

With earnings that are retreating more than the market's of late, Beauty Farm Medical and Health Industry has been very sluggish. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Beauty Farm Medical and Health Industry

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Beauty Farm Medical and Health Industry.

Does Growth Match The High P/E?

The only time you'd be truly comfortable seeing a P/E as steep as Beauty Farm Medical and Health Industry's is when the company's growth is on track to outshine the market decidedly.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 47%. As a result, earnings from three years ago have also fallen 38% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 57% each year during the coming three years according to the three analysts following the company. That's shaping up to be materially higher than the 21% per annum growth forecast for the broader market.

In light of this, it's understandable that Beauty Farm Medical and Health Industry'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 Bottom Line On Beauty Farm Medical and Health Industry's P/E

Even after such a strong price drop, Beauty Farm Medical and Health Industry's P/E still exceeds the rest of the market significantly. 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.

We've established that Beauty Farm Medical and Health Industry maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. 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.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Beauty Farm Medical and Health Industry that you need to be mindful of.

You might be able to find a better investment than Beauty Farm Medical and Health Industry. 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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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.