Market Participants Recognise Jiangyin Jianghua Microelectronics Materials Co., Ltd's (SHSE:603078) Earnings Pushing Shares 29% Higher

Jiangyin Jianghua Microelectronics Materials Co., Ltd (SHSE:603078) shareholders have had their patience rewarded with a 29% share price jump in the last month. Longer-term shareholders would be thankful for the recovery in the share price since it's now virtually flat for the year after the recent bounce.

Following the firm bounce in price, given close to half the companies in China have price-to-earnings ratios (or "P/E's") below 36x, you may consider Jiangyin Jianghua Microelectronics Materials as a stock to avoid entirely with its 74.8x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

Jiangyin Jianghua Microelectronics Materials has been struggling lately as its earnings have declined faster than most other companies. It might be that many expect the dismal earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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Does Growth Match The High P/E?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Jiangyin Jianghua Microelectronics Materials' to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 26%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 89% 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.

Looking ahead now, EPS is anticipated to climb by 83% during the coming year according to the three analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 41%, which is noticeably less attractive.

In light of this, it's understandable that Jiangyin Jianghua Microelectronics Materials' P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

Shares in Jiangyin Jianghua Microelectronics Materials have built up some good momentum lately, which has really inflated its P/E. 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 Jiangyin Jianghua Microelectronics Materials' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

A lot of potential risks can sit within a company's balance sheet. Take a look at our free balance sheet analysis for Jiangyin Jianghua Microelectronics Materials with six simple checks on some of these key factors.

If you're unsure about the strength of Jiangyin Jianghua Microelectronics Materials' 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.