Zhejiang Cheng Yi Pharmaceutical Co., Ltd. (SHSE:603811) shareholders that were waiting for something to happen have been dealt a blow with a 28% share price drop in the last month. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 31% share price drop.
In spite of the heavy fall in price, Zhejiang Cheng Yi Pharmaceutical's price-to-earnings (or "P/E") ratio of 14.1x might still make it look like a strong buy right now compared to the market in China, where around half of the companies have P/E ratios above 30x and even P/E's above 54x are quite common. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.
Zhejiang Cheng Yi Pharmaceutical has been doing a good job lately as it's been growing earnings at a solid pace. It might be that many expect the respectable earnings performance to degrade substantially, which has repressed the P/E. 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 out of favour.
Check out our latest analysis for Zhejiang Cheng Yi Pharmaceutical
Is There Any Growth For Zhejiang Cheng Yi Pharmaceutical?
Zhejiang Cheng Yi Pharmaceutical's P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.
Retrospectively, the last year delivered a decent 14% gain to the company's bottom line. EPS has also lifted 27% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been respectable for the company.
This is in contrast to the rest of the market, which is expected to grow by 42% over the next year, materially higher than the company's recent medium-term annualised growth rates.
With this information, we can see why Zhejiang Cheng Yi Pharmaceutical is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.
The Bottom Line On Zhejiang Cheng Yi Pharmaceutical's P/E
Having almost fallen off a cliff, Zhejiang Cheng Yi Pharmaceutical's share price has pulled its P/E way down as well. 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.
As we suspected, our examination of Zhejiang Cheng Yi Pharmaceutical revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. If recent medium-term earnings trends continue, 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 - Zhejiang Cheng Yi Pharmaceutical has 2 warning signs we think you should be aware of.
If these risks are making you reconsider your opinion on Zhejiang Cheng Yi Pharmaceutical, explore our interactive list of high quality stocks to get an idea of what else is out there.
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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.