There's Reason For Concern Over Shanghai Fudan-Zhangjiang Bio-Pharmaceutical Co.,Ltd.'s (HKG:1349) Massive 51% Price Jump

The Shanghai Fudan-Zhangjiang Bio-Pharmaceutical Co.,Ltd. (HKG:1349) share price has done very well over the last month, posting an excellent gain of 51%. Unfortunately, despite the strong performance over the last month, the full year gain of 3.9% isn't as attractive.

Since its price has surged higher, Shanghai Fudan-Zhangjiang Bio-PharmaceuticalLtd may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 22.7x, since almost half of all companies in Hong Kong have P/E ratios under 9x and even P/E's lower than 6x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

For instance, Shanghai Fudan-Zhangjiang Bio-PharmaceuticalLtd's receding earnings in recent times would have to be some food for thought. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.

Check out our latest analysis for Shanghai Fudan-Zhangjiang Bio-PharmaceuticalLtd

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 Shanghai Fudan-Zhangjiang Bio-PharmaceuticalLtd's earnings, revenue and cash flow.

Does Growth Match The High P/E?

In order to justify its P/E ratio, Shanghai Fudan-Zhangjiang Bio-PharmaceuticalLtd would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered a frustrating 55% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 45% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

In contrast to the company, the rest of the market is expected to grow by 22% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

With this information, we find it concerning that Shanghai Fudan-Zhangjiang Bio-PharmaceuticalLtd is trading at a P/E higher than the market. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

The Final Word

Shares in Shanghai Fudan-Zhangjiang Bio-PharmaceuticalLtd have built up some good momentum lately, which has really inflated its P/E. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Shanghai Fudan-Zhangjiang Bio-PharmaceuticalLtd currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Shanghai Fudan-Zhangjiang Bio-PharmaceuticalLtd (1 can't be ignored!) that you need to be mindful of.

Of course, you might also be able to find a better stock than Shanghai Fudan-Zhangjiang Bio-PharmaceuticalLtd. 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.