SciClone Pharmaceuticals (Holdings) Limited's (HKG:6600) 35% Price Boost Is Out Of Tune With Earnings

SciClone Pharmaceuticals (Holdings) Limited (HKG:6600) shareholders have had their patience rewarded with a 35% share price jump in the last month. Looking back a bit further, it's encouraging to see the stock is up 78% in the last year.

Although its price has surged higher, you could still be forgiven for feeling indifferent about SciClone Pharmaceuticals (Holdings)'s P/E ratio of 9x, since the median price-to-earnings (or "P/E") ratio in Hong Kong is also close to 9x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

With earnings growth that's superior to most other companies of late, SciClone Pharmaceuticals (Holdings) has been doing relatively well. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. 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.

View our latest analysis for SciClone Pharmaceuticals (Holdings)

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How Is SciClone Pharmaceuticals (Holdings)'s Growth Trending?

In order to justify its P/E ratio, SciClone Pharmaceuticals (Holdings) would need to produce growth that's similar to the market.

Retrospectively, the last year delivered an exceptional 44% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 34% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the dual analysts covering the company suggest earnings growth is heading into negative territory, declining 7.7% over the next year. Meanwhile, the broader market is forecast to expand by 21%, which paints a poor picture.

In light of this, it's somewhat alarming that SciClone Pharmaceuticals (Holdings)'s P/E sits in line with the majority of other companies. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock right now. Only the boldest would assume these prices are sustainable as these declining earnings are likely to weigh on the share price eventually.

What We Can Learn From SciClone Pharmaceuticals (Holdings)'s P/E?

SciClone Pharmaceuticals (Holdings)'s stock has a lot of momentum behind it lately, which has brought its P/E level with the market. 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.

We've established that SciClone Pharmaceuticals (Holdings) currently trades on a higher than expected P/E for a company whose earnings are forecast to decline. Right now we are uncomfortable with the P/E as the predicted future earnings are unlikely to support a more positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for SciClone Pharmaceuticals (Holdings) with six simple checks will allow you to discover any risks that could be an issue.

Of course, you might also be able to find a better stock than SciClone Pharmaceuticals (Holdings). 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.