Grand Pharmaceutical Group Limited (HKG:512) Looks Inexpensive But Perhaps Not Attractive Enough

When close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") above 9x, you may consider Grand Pharmaceutical Group Limited (HKG:512) as an attractive investment with its 6.2x 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.

There hasn't been much to differentiate Grand Pharmaceutical Group's and the market's earnings growth lately. One possibility is that the P/E is low because investors think this modest earnings performance may begin to slide. If you like the company, you'd be hoping this isn't the case so that you could pick up some stock while it's out of favour.

See our latest analysis for Grand Pharmaceutical Group

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

How Is Grand Pharmaceutical Group's Growth Trending?

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

Retrospectively, the last year delivered virtually the same number to the company's bottom line as the year before. Still, the latest three year period was better as it's delivered a decent 6.7% overall rise in EPS. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Shifting to the future, estimates from the two analysts covering the company suggest earnings should grow by 5.5% per annum over the next three years. That's shaping up to be materially lower than the 12% per year growth forecast for the broader market.

With this information, we can see why Grand Pharmaceutical Group is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Key Takeaway

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.

We've established that Grand Pharmaceutical Group maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

You always need to take note of risks, for example - Grand Pharmaceutical Group has 1 warning sign we think you should be aware of.

Of course, you might also be able to find a better stock than Grand 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.