There's No Escaping Shannon Semiconductor Technology Co.,Ltd.'s (SZSE:300475) Muted Earnings Despite A 29% Share Price Rise

The Shannon Semiconductor Technology Co.,Ltd. (SZSE:300475) share price has done very well over the last month, posting an excellent gain of 29%. Looking further back, the 22% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

Even after such a large jump in price, given about half the companies in China have price-to-earnings ratios (or "P/E's") above 39x, you may still consider Shannon Semiconductor TechnologyLtd as an attractive investment with its 32.2x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Shannon Semiconductor TechnologyLtd has been doing quite well of late. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

View our latest analysis for Shannon Semiconductor TechnologyLtd

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How Is Shannon Semiconductor TechnologyLtd's Growth Trending?

There's an inherent assumption that a company should underperform the market for P/E ratios like Shannon Semiconductor TechnologyLtd's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 37% gain to the company's bottom line. The latest three year period has also seen an excellent 206% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the two analysts covering the company suggest earnings growth is heading into negative territory, declining 7.0% over the next year. That's not great when the rest of the market is expected to grow by 37%.

With this information, we are not surprised that Shannon Semiconductor TechnologyLtd is trading at a P/E lower than the market. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Final Word

Despite Shannon Semiconductor TechnologyLtd's shares building up a head of steam, its P/E still lags most other companies. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Shannon Semiconductor TechnologyLtd maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

The company's balance sheet is another key area for risk analysis. You can assess many of the main risks through our free balance sheet analysis for Shannon Semiconductor TechnologyLtd with six simple checks.

If you're unsure about the strength of Shannon Semiconductor TechnologyLtd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.