Beijing Sun-Novo Pharmaceutical Research Co., Ltd.'s (SHSE:688621) price-to-earnings (or "P/E") ratio of 35.9x might make it look like a sell right now compared to the market in China, where around half of the companies have P/E ratios below 30x and even P/E's below 18x are quite common. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's superior to most other companies of late, Beijing Sun-Novo Pharmaceutical Research has been doing relatively well. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

Does Growth Match The High P/E?

There's an inherent assumption that a company should outperform the market for P/E ratios like Beijing Sun-Novo Pharmaceutical Research's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 24% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 100% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to climb by 57% during the coming year according to the three analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 39%, which is noticeably less attractive.

In light of this, it's understandable that Beijing Sun-Novo Pharmaceutical Research's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

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.

We've established that Beijing Sun-Novo Pharmaceutical Research maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

Having said that, be aware Beijing Sun-Novo Pharmaceutical Research is showing 1 warning sign in our investment analysis, you should know about.

If you're unsure about the strength of Beijing Sun-Novo Pharmaceutical Research'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.