China Shineway Pharmaceutical Group Limited's (HKG:2877) Price Is Right But Growth Is Lacking After Shares Rocket 27%

The China Shineway Pharmaceutical Group Limited (HKG:2877) share price has done very well over the last month, posting an excellent gain of 27%. The last 30 days bring the annual gain to a very sharp 36%.

Although its price has surged higher, China Shineway Pharmaceutical Group may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 6.2x, since almost half of all companies in Hong Kong have P/E ratios greater than 10x and even P/E's higher than 20x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

With earnings growth that's superior to most other companies of late, China Shineway Pharmaceutical Group has been doing relatively well. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. 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.

View our latest analysis for China Shineway Pharmaceutical Group

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Does Growth Match The Low P/E?

In order to justify its P/E ratio, China Shineway Pharmaceutical Group would need to produce sluggish growth that's trailing the market.

If we review the last year of earnings growth, the company posted a terrific increase of 25%. The latest three year period has also seen an excellent 216% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 6.9% each year as estimated by the three analysts watching the company. With the market predicted to deliver 12% growth each year, the company is positioned for a weaker earnings result.

With this information, we can see why China Shineway Pharmaceutical Group is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Final Word

The latest share price surge wasn't enough to lift China Shineway Pharmaceutical Group's P/E close to the market median. 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.

As we suspected, our examination of China Shineway Pharmaceutical Group's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. 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.

It is also worth noting that we have found 1 warning sign for China Shineway Pharmaceutical Group that you need to take into consideration.

Of course, you might also be able to find a better stock than China Shineway Pharmaceutical Group. 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.