Mayinglong Pharmaceutical Group Co., Ltd. (SHSE:600993) shareholders have had their patience rewarded with a 26% share price jump in the last month. Looking further back, the 11% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.
In spite of the firm bounce in price, it's still not a stretch to say that Mayinglong Pharmaceutical Group's price-to-earnings (or "P/E") ratio of 26.8x right now seems quite "middle-of-the-road" compared to the market in China, where the median P/E ratio is around 29x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.
For example, consider that Mayinglong Pharmaceutical Group's financial performance has been poor lately as its earnings have been in decline. It might be that many expect the company to put the disappointing earnings performance behind them over the coming period, which has kept the P/E from falling. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.
Does Growth Match The P/E?
The only time you'd be comfortable seeing a P/E like Mayinglong Pharmaceutical Group's is when the company's growth is tracking the market closely.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 14%. That put a dampener on the good run it was having over the longer-term as its three-year EPS growth is still a noteworthy 6.2% in total. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been mostly respectable for the company.
Comparing that to the market, which is predicted to deliver 35% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.
With this information, we find it interesting that Mayinglong Pharmaceutical Group is trading at a fairly similar P/E to the market. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as a continuation of recent earnings trends is likely to weigh down the shares eventually.
The Bottom Line On Mayinglong Pharmaceutical Group's P/E
Its shares have lifted substantially and now Mayinglong Pharmaceutical Group's P/E is also back up to the market median. 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 Mayinglong Pharmaceutical Group currently trades on a higher than expected P/E since its recent three-year growth is lower than the wider market forecast. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.
You always need to take note of risks, for example - Mayinglong Pharmaceutical Group has 1 warning sign we think you should be aware of.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.
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