Investors Appear Satisfied With Espressif Systems (Shanghai) Co., Ltd.'s (SHSE:688018) Prospects As Shares Rocket 52%

Espressif Systems (Shanghai) Co., Ltd. (SHSE:688018) shareholders would be excited to see that the share price has had a great month, posting a 52% gain and recovering from prior weakness. The last 30 days bring the annual gain to a very sharp 87%.

Following the firm bounce in price, Espressif Systems (Shanghai) may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 69.9x, since almost half of all companies in China have P/E ratios under 33x and even P/E's lower than 20x are not unusual. 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 Espressif Systems (Shanghai) as its earnings have risen in spite of the market's earnings going into reverse. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Espressif Systems (Shanghai)

Keen to find out how analysts think Espressif Systems (Shanghai)'s future stacks up against the industry? In that case, our free report is a great place to start.

How Is Espressif Systems (Shanghai)'s Growth Trending?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Espressif Systems (Shanghai)'s to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 160%. The latest three year period has also seen an excellent 32% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the five analysts covering the company suggest earnings should grow by 26% each year over the next three years. With the market only predicted to deliver 19% per annum, the company is positioned for a stronger earnings result.

With this information, we can see why Espressif Systems (Shanghai) is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Espressif Systems (Shanghai)'s P/E

Shares in Espressif Systems (Shanghai) 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.

We've established that Espressif Systems (Shanghai) maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Espressif Systems (Shanghai) that you should be aware of.

You might be able to find a better investment than Espressif Systems (Shanghai). If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.