Down 25%, but Qingdao Baheal Medical INC. (SZSE:301015) may be riskier than it seems

This Qingdao Baheal Medical INC. The company’s (SZSE:301015) share price has performed very poorly over the past month, falling by a whopping 25%. Instead of being rewarded, shareholders who held onto the stock for the past twelve months are now looking at a 15% share price drop.

Although Qingdao Baheal Medical’s price has declined significantly, Qingdao Baheal Medical’s price-to-earnings (or “P/E”) ratio of 18.8x may still make it compared to the market in China, where about half of companies have P/E ratios E above 29x and even P/E above 54x are quite common. However, the P/E ratio may be low for a reason and requires further investigation to determine whether it is justified.

With earnings growth that is better than most peers of late, Qingdao Baheal Medical is doing relatively well. One possibility is that the P/E is low because investors believe that this strong earnings performance may be less impressive in the future. If not, then current shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for Qingdao Baheal Medical

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What do growth rates tell us about the low P/E ratio?

Qingdao Baheal Medical’s P/E ratio would be typical of a company that is expected to see only limited growth and, importantly, underperform the market.

Looking back, the company grew its earnings per share by an impressive 30% over the past year. Interestingly, EPS is also up 115% overall over the three years, thanks to growth over the past 12 months. It’s safe to say that the company’s earnings growth has been excellent in recent times.

Turning to forecasts, the next three years should generate growth of 26% annually, according to estimates from three analysts following the company. This lines up similarly to the 25% annual growth forecast for the broader market.

Given this information, it seems odd to us that Qingdao Baheal Medical is trading at a P/E ratio lower than the market. It may be that most investors are not convinced that the company can achieve its future growth expectations.

Qingdao Baheal Medical’s P/E Performance Summary

The softening of Qingdao Baheal Medical shares means that its P/E is currently trading at a fairly low level. Using the price-to-earnings ratio alone to determine whether you should sell your shares is not wise, but it can be a useful guide to the company’s future prospects.

Our study of Qingdao Baheal Medical analyst forecasts shows that the market-aligned earnings forecasts are not contributing as much to the P/E as we had anticipated. There may be some unseen risks to earnings that prevent the P/E from matching forecasts. At least the downside risk seems to be limited, but investors seem to think that future earnings could be somewhat volatile.

Besides, you should also find out about this 1 warning sign we’ve spotted with Qingdao Baheal Medical.

Of course, you can also find better stock than Qingdao Baheal Medical. So you might want to see this free a group of other companies that have reasonable P/E ratios and have seen significant earnings growth.

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