It's not a stretch to say that CSPC Pharmaceutical Group Limited's (HKG:1093) price-to-earnings (or "P/E") ratio of 9.5x right now seems quite "middle-of-the-road" compared to the market in Hong Kong, where the median P/E ratio is around 10x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

CSPC Pharmaceutical Group hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. One possibility is that the P/E is moderate because investors think this poor earnings performance will turn around. If not, then existing shareholders may be a little nervous about the viability of the share price.

View our latest analysis for CSPC Pharmaceutical Group

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How Is CSPC Pharmaceutical Group's Growth Trending?

CSPC Pharmaceutical Group's P/E ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 15%. As a result, earnings from three years ago have also fallen 10% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 3.6% per year as estimated by the analysts watching the company. With the market predicted to deliver 13% growth each year, that's a disappointing outcome.

With this information, we find it concerning that CSPC Pharmaceutical Group is trading at a fairly similar P/E to the market. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the negative growth outlook.

The Bottom Line On CSPC Pharmaceutical Group's P/E

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 CSPC Pharmaceutical Group currently trades on a higher than expected P/E for a company whose earnings are forecast to decline. When we see a poor outlook with earnings heading backwards, we suspect 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 CSPC Pharmaceutical Group that you need to be mindful of.

Of course, you might also be able to find a better stock than CSPC Pharmaceutical Group. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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