Simcere Pharmaceutical Group Limited's (HKG:2096) Business And Shares Still Trailing The Market

When close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") above 10x, you may consider Simcere Pharmaceutical Group Limited (HKG:2096) as an attractive investment with its 5x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Simcere Pharmaceutical Group certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

See our latest analysis for Simcere Pharmaceutical Group

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How Is Simcere Pharmaceutical Group's Growth Trending?

There's an inherent assumption that a company should underperform the market for P/E ratios like Simcere Pharmaceutical Group's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 209% last year. Pleasingly, EPS has also lifted 287% 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.

Shifting to the future, estimates from the seven analysts covering the company suggest earnings growth is heading into negative territory, declining 18% per annum over the next three years. With the market predicted to deliver 16% growth per year, that's a disappointing outcome.

In light of this, it's understandable that Simcere Pharmaceutical Group's P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Key Takeaway

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Simcere Pharmaceutical Group maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Plus, you should also learn about these 2 warning signs we've spotted with Simcere Pharmaceutical Group.

If these risks are making you reconsider your opinion on Simcere Pharmaceutical Group, 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.