Market Participants Recognise Charmacy Pharmaceutical Co., Ltd.'s (HKG:2289) Earnings Pushing Shares 42% Higher
The Charmacy Pharmaceutical Co., Ltd. (HKG:2289) share price has done very well over the last month, posting an excellent gain of 42%. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 23% in the last twelve months.
After such a large jump in price, Charmacy Pharmaceutical's price-to-earnings (or "P/E") ratio of 14.6x might make it look like a sell right now compared to the market in Hong Kong, where around half of the companies have P/E ratios below 12x and even P/E's below 7x are quite common. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.
For example, consider that Charmacy Pharmaceutical's financial performance has been poor lately as its earnings have been in decline. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.
See our latest analysis for Charmacy Pharmaceutical
Does Growth Match The High P/E?
The only time you'd be truly comfortable seeing a P/E as high as Charmacy Pharmaceutical's is when the company's growth is on track to outshine the market.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 6.7%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 171% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.
This is in contrast to the rest of the market, which is expected to grow by 20% over the next year, materially lower than the company's recent medium-term annualised growth rates.
In light of this, it's understandable that Charmacy Pharmaceutical's P/E sits above the majority of other companies. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the bourse.
What We Can Learn From Charmacy Pharmaceutical's P/E?
Charmacy Pharmaceutical shares have received a push in the right direction, but its P/E is elevated too. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.
As we suspected, our examination of Charmacy Pharmaceutical revealed its three-year earnings trends are contributing to its high P/E, given they look better than current market expectations. Right now shareholders are comfortable with the P/E as they are quite confident earnings aren't under threat. If recent medium-term earnings trends continue, 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 - Charmacy Pharmaceutical has 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.
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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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.