Beijing Wantai Biological Pharmacy Enterprise Co., Ltd. (SHSE:603392) shares have continued their recent momentum with a 27% gain in the last month alone. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 22% over that time.
After such a large jump in price, Beijing Wantai Biological Pharmacy Enterprise may be sending bearish signals at the moment with its price-to-earnings (or “P/E”) ratio of 34.6x, since almost half of all companies in China have P/E ratios under 30x 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.
Beijing Wantai Biological Pharmacy Enterprise has been struggling lately as its earnings have declined faster than most other companies. It might be that many expect the dismal earnings performance to recover substantially, which has kept the P/E from collapsing. You’d really hope so, otherwise you’re paying a pretty hefty price for no particular reason.
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Is There Enough Growth For Beijing Wantai Biological Pharmacy Enterprise?
In order to justify its P/E ratio, Beijing Wantai Biological Pharmacy Enterprise would need to produce impressive growth in excess of the market.
Taking a look back first, the company’s earnings per share growth last year wasn’t something to get excited about as it posted a disappointing decline of 47%. Still, the latest three year period has seen an excellent 334% overall rise in EPS, in spite of its unsatisfying short-term performance. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.
Looking ahead now, EPS is anticipated to climb by 108% during the coming year according to the four analysts following the company. That’s shaping up to be materially higher than the 41% growth forecast for the broader market.
With this information, we can see why Beijing Wantai Biological Pharmacy Enterprise is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
What We Can Learn From Beijing Wantai Biological Pharmacy Enterprise’s P/E?
The large bounce in Beijing Wantai Biological Pharmacy Enterprise’s shares has lifted the company’s P/E to a fairly high level. 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.
As we suspected, our examination of Beijing Wantai Biological Pharmacy Enterprise’s analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren’t under threat. It’s hard to see the share price falling strongly in the near future under these circumstances.
You need to take note of risks, for example – Beijing Wantai Biological Pharmacy Enterprise has 3 warning signs (and 2 which are a bit concerning) we think you should know about.
If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.
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Find out whether Beijing Wantai Biological Pharmacy Enterprise is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.
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