To the annoyance of some shareholders, China Resources Pharmaceutical Group (HKG:3320) shares are down a considerable 32% in the last month. Indeed the recent decline has arguably caused some bitterness for shareholders who have held through the 53% drop over twelve months.

Assuming nothing else has changed, a lower share price makes a stock more attractive to potential buyers. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. The implication here is that long term investors have an opportunity when expectations of a company are too low. Perhaps the simplest way to get a read on investors' expectations of a business is to look at its Price to Earnings Ratio (PE Ratio). A high P/E implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.

View our latest analysis for China Resources Pharmaceutical Group

How Does China Resources Pharmaceutical Group's P/E Ratio Compare To Its Peers?

China Resources Pharmaceutical Group's P/E of 6.70 indicates relatively low sentiment towards the stock. If you look at the image below, you can see China Resources Pharmaceutical Group has a lower P/E than the average (10.1) in the pharmaceuticals industry classification.

China Resources Pharmaceutical Group's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with China Resources Pharmaceutical Group, it's quite possible it could surprise on the upside. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.

How Growth Rates Impact P/E Ratios

Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. Earnings growth means that in the future the 'E' will be higher. And in that case, the P/E ratio itself will drop rather quickly. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

China Resources Pharmaceutical Group increased earnings per share by an impressive 23% over the last twelve months. And earnings per share have improved by 2.9% annually, over the last five years. This could arguably justify a relatively high P/E ratio.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. So it won't reflect the advantage of cash, or disadvantage of debt. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).