Hansoh Pharmaceutical Group Company Limited's (HKG:3692) Shares Climb 31% But Its Business Is Yet to Catch Up

Hansoh Pharmaceutical Group Company Limited (HKG:3692) shareholders have had their patience rewarded with a 31% share price jump in the last month. The last 30 days bring the annual gain to a very sharp 52%.

Since its price has surged higher, given close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") below 11x, you may consider Hansoh Pharmaceutical Group as a stock to avoid entirely with its 29.9x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

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Recent times have been advantageous for Hansoh Pharmaceutical Group as its earnings have been rising faster than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Hansoh Pharmaceutical Group

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Hansoh Pharmaceutical Group.

How Is Hansoh Pharmaceutical Group's Growth Trending?

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

If we review the last year of earnings growth, the company posted a terrific increase of 33%. The strong recent performance means it was also able to grow EPS by 61% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 8.9% each year over the next three years. That's shaping up to be materially lower than the 13% per annum growth forecast for the broader market.

In light of this, it's alarming that Hansoh Pharmaceutical Group's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

What We Can Learn From Hansoh Pharmaceutical Group's P/E?

The strong share price surge has got Hansoh Pharmaceutical Group's P/E rushing to great heights as well. 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 Hansoh Pharmaceutical Group's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

The company's balance sheet is another key area for risk analysis. You can assess many of the main risks through our free balance sheet analysis for Hansoh Pharmaceutical Group with six simple checks.

If you're unsure about the strength of Hansoh 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.