China Biotech Services Holdings Limited's (HKG:8037) Popularity With Investors Under Threat As Stock Sinks 31%

China Biotech Services Holdings Limited (HKG:8037) shareholders that were waiting for something to happen have been dealt a blow with a 31% share price drop in the last month. For any long-term shareholders, the last month ends a year to forget by locking in a 61% share price decline.

Even after such a large drop in price, given around half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") below 8x, you may still consider China Biotech Services Holdings as a stock to potentially avoid with its 11.8x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

For instance, China Biotech Services Holdings' 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.

Check out our latest analysis for China Biotech Services Holdings

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 China Biotech Services Holdings' earnings, revenue and cash flow.

Does Growth Match The High P/E?

There's an inherent assumption that a company should outperform the market for P/E ratios like China Biotech Services Holdings' to be considered reasonable.

Retrospectively, the last year delivered a frustrating 56% decrease to the company's bottom line. This has erased any of its gains during the last three years, with practically no change in EPS being achieved in total. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 23% shows it's noticeably less attractive on an annualised basis.

In light of this, it's alarming that China Biotech Services Holdings' P/E sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates 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.

What We Can Learn From China Biotech Services Holdings' P/E?

There's still some solid strength behind China Biotech Services Holdings' P/E, if not its share price lately. 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.

Our examination of China Biotech Services Holdings revealed its three-year earnings trends aren't impacting its high P/E anywhere near as much as we would have predicted, given they look worse than current market expectations. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. 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 - China Biotech Services Holdings has 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

If these risks are making you reconsider your opinion on China Biotech Services Holdings, 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.