Earnings Tell The Story For KINGSEMI Co., Ltd. (SHSE:688037) As Its Stock Soars 27%

Those holding KINGSEMI Co., Ltd. (SHSE:688037) 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. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 40% over that time.

Since its price has surged higher, KINGSEMI's price-to-earnings (or "P/E") ratio of 77.3x might make it look like a strong sell right now compared to the market in China, where around half of the companies have P/E ratios below 30x and even P/E's below 18x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

KINGSEMI could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. It might be that many expect the dour 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.

See our latest analysis for KINGSEMI

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

Does Growth Match The High P/E?

KINGSEMI's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

Retrospectively, the last year delivered a frustrating 16% decrease to the company's bottom line. Even so, admirably EPS has lifted 181% in aggregate from three years ago, notwithstanding the last 12 months. 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.

Turning to the outlook, the next three years should generate growth of 44% per annum as estimated by the five analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 25% each year, which is noticeably less attractive.

With this information, we can see why KINGSEMI 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.

What We Can Learn From KINGSEMI's P/E?

The strong share price surge has got KINGSEMI's P/E rushing to great heights as well. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of KINGSEMI'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. Unless these conditions change, they will continue to provide strong support to the share price.

We don't want to rain on the parade too much, but we did also find 2 warning signs for KINGSEMI (1 shouldn't be ignored!) that you need to be mindful of.

If you're unsure about the strength of KINGSEMI'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.