What You Can Learn From Advanced Micro-Fabrication Equipment Inc. China's (SHSE:688012) P/E

When close to half the companies in China have price-to-earnings ratios (or "P/E's") below 34x, you may consider Advanced Micro-Fabrication Equipment Inc. China (SHSE:688012) as a stock to avoid entirely with its 76.3x 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.

Recent times have been pleasing for Advanced Micro-Fabrication Equipment China as its earnings have risen in spite of the market's earnings going into reverse. 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Advanced Micro-Fabrication Equipment China

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Advanced Micro-Fabrication Equipment China.

Does Growth Match The High P/E?

The only time you'd be truly comfortable seeing a P/E as steep as Advanced Micro-Fabrication Equipment China's is when the company's growth is on track to outshine the market decidedly.

Taking a look back first, we see that there was hardly any earnings per share growth to speak of for the company over the past year. Although pleasingly EPS has lifted 83% in aggregate from three years ago, notwithstanding the last 12 months. 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 35% per annum as estimated by the analysts watching the company. That's shaping up to be materially higher than the 21% per annum growth forecast for the broader market.

With this information, we can see why Advanced Micro-Fabrication Equipment China is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Key Takeaway

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.

As we suspected, our examination of Advanced Micro-Fabrication Equipment China's 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. It's hard to see the share price falling strongly in the near future under these circumstances.

You always need to take note of risks, for example - Advanced Micro-Fabrication Equipment China has 1 warning sign we think you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.