With a price-to-earnings (or "P/E") ratio of 36.1x Aurisco Pharmaceutical Co.,Ltd. (SHSE:605116) may be sending bearish signals at the moment, given that almost half of all companies in China have P/E ratios under 29x and even P/E's lower than 18x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.
With its earnings growth in positive territory compared to the declining earnings of most other companies, Aurisco PharmaceuticalLtd has been doing quite well of late. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors' willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.
View our latest analysis for Aurisco PharmaceuticalLtd
Does Growth Match The High P/E?
Aurisco PharmaceuticalLtd's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.
Taking a look back first, we see that the company managed to grow earnings per share by a handy 14% last year. The solid recent performance means it was also able to grow EPS by 8.8% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been respectable for the company.
Turning to the outlook, the next year should generate growth of 43% as estimated by the two analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 42%, which is not materially different.
In light of this, it's curious that Aurisco PharmaceuticalLtd's P/E sits above the majority of other companies. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.
What We Can Learn From Aurisco PharmaceuticalLtd's P/E?
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 Aurisco PharmaceuticalLtd's analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.
Having said that, be aware Aurisco PharmaceuticalLtd is showing 1 warning sign in our investment analysis, you should know about.
If you're unsure about the strength of Aurisco PharmaceuticalLtd'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.