Earnings Not Telling The Story For CSPC Pharmaceutical Group Limited (HKG:1093) After Shares Rise 26%

Those holding CSPC Pharmaceutical Group Limited (HKG:1093) shares would be relieved that the share price has rebounded 26% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Notwithstanding the latest gain, the annual share price return of 5.4% isn't as impressive.

Although its price has surged higher, you could still be forgiven for feeling indifferent about CSPC Pharmaceutical Group's P/E ratio of 10.7x, since the median price-to-earnings (or "P/E") ratio in Hong Kong is also close to 10x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

CSPC Pharmaceutical Group could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. It might be that many expect the dour earnings performance to strengthen positively, which has kept the P/E from falling. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

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Is There Some Growth For CSPC Pharmaceutical Group?

In order to justify its P/E ratio, CSPC Pharmaceutical Group would need to produce growth that's similar to the market.

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 2.2%. At least EPS has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Looking ahead now, EPS is anticipated to slump, contracting by 0.5% each year during the coming three years according to the analysts following the company. With the market predicted to deliver 12% growth per annum, that's a disappointing outcome.

With this information, we find it concerning that CSPC Pharmaceutical Group is trading at a fairly similar P/E to the market. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock right now. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the negative growth outlook.

The Final Word

CSPC Pharmaceutical Group's stock has a lot of momentum behind it lately, which has brought its P/E level with the market. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

Our examination of CSPC Pharmaceutical Group's analyst forecasts revealed that its outlook for shrinking earnings isn't impacting its P/E as much as we would have predicted. When we see a poor outlook with earnings heading backwards, we suspect share price is at risk of declining, sending the moderate P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for CSPC Pharmaceutical Group that you should be aware of.

If you're unsure about the strength of CSPC Pharmaceutical Group's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.