What Advanced Micro-Fabrication Equipment Inc. China's (SHSE:688012) 27% Share Price Gain Is Not Telling You

Those holding Advanced Micro-Fabrication Equipment Inc. China (SHSE:688012) shares would be relieved that the share price has rebounded 27% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Taking a wider view, although not as strong as the last month, the full year gain of 24% is also fairly reasonable.

After such a large jump in price, given close to half the companies in China have price-to-earnings ratios (or "P/E's") below 30x, you may consider Advanced Micro-Fabrication Equipment China as a stock to avoid entirely with its 54.1x P/E ratio. However, the P/E might be quite high 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, Advanced Micro-Fabrication Equipment China has been doing quite well of late. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Advanced Micro-Fabrication Equipment China

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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 Advanced Micro-Fabrication Equipment China's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 52% gain to the company's bottom line. The latest three year period has also seen an excellent 213% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 21% each year as estimated by the analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 21% per year, which is not materially different.

In light of this, it's curious that Advanced Micro-Fabrication Equipment China's P/E sits above the majority of other companies. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

The Key Takeaway

Advanced Micro-Fabrication Equipment China's P/E is flying high just like its stock has during the last month. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

Our examination of Advanced Micro-Fabrication Equipment China's analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

Many other vital risk factors can be found on the company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Advanced Micro-Fabrication Equipment China with six simple checks.

Of course, you might also be able to find a better stock than Advanced Micro-Fabrication Equipment China. 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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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.