With a median price-to-earnings (or "P/E") ratio of close to 10x in Hong Kong, you could be forgiven for feeling indifferent about China Resources Pharmaceutical Group Limited's (HKG:3320) P/E ratio of 8.3x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.
With earnings growth that's superior to most other companies of late, China Resources Pharmaceutical Group 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 not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.
View our latest analysis for China Resources Pharmaceutical Group
How Is China Resources Pharmaceutical Group's Growth Trending?
There's an inherent assumption that a company should be matching the market for P/E ratios like China Resources Pharmaceutical Group's to be considered reasonable.
Taking a look back first, we see that the company managed to grow earnings per share by a handy 12% last year. The latest three year period has also seen an excellent 44% overall rise in EPS, aided somewhat by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.
Looking ahead now, EPS is anticipated to climb by 7.7% per annum during the coming three years according to the ten analysts following the company. That's shaping up to be materially lower than the 13% per annum growth forecast for the broader market.
In light of this, it's curious that China Resources Pharmaceutical Group's P/E sits in line with the majority of other companies. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.
The Key Takeaway
We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
Our examination of China Resources Pharmaceutical Group's analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.
We don't want to rain on the parade too much, but we did also find 1 warning sign for China Resources Pharmaceutical Group that you need to be mindful of.
If these risks are making you reconsider your opinion on China Resources Pharmaceutical Group, 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.