Grand Pharmaceutical Group Limited (HKG:512) Stock Rockets 41% As Investors Are Less Pessimistic Than Expected

Grand Pharmaceutical Group Limited (HKG:512) shares have continued their recent momentum with a 41% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 64%.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about Grand Pharmaceutical Group's P/E ratio of 11.8x, since the median price-to-earnings (or "P/E") ratio in Hong Kong is also close to 11x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

We've discovered 1 warning sign about Grand Pharmaceutical Group. View them for free.

Grand Pharmaceutical Group certainly has been doing a good job lately as it's been growing earnings more than most other companies. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. 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 not quite in favour.

See our latest analysis for Grand Pharmaceutical Group

Keen to find out how analysts think Grand Pharmaceutical Group's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Grand Pharmaceutical Group's Growth Trending?

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

Retrospectively, the last year delivered an exceptional 32% gain to the company's bottom line. Still, EPS has barely risen at all from three years ago in total, which is not ideal. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Looking ahead now, EPS is anticipated to climb by 3.9% per annum during the coming three years according to the four analysts following the company. Meanwhile, the rest of the market is forecast to expand by 15% each year, which is noticeably more attractive.

In light of this, it's curious that Grand Pharmaceutical Group's P/E sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.

The Final Word

Its shares have lifted substantially and now Grand Pharmaceutical Group's P/E is also back up to the market median. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Grand Pharmaceutical Group's analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

You should always think about risks. Case in point, we've spotted 1 warning sign for Grand Pharmaceutical Group you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.