Why Investors Shouldn't Be Surprised By Amlogic (Shanghai) Co.,Ltd.'s (SHSE:688099) 29% Share Price Surge

Amlogic (Shanghai) Co.,Ltd. (SHSE:688099) shares have had a really impressive month, gaining 29% after a shaky period beforehand. Taking a wider view, although not as strong as the last month, the full year gain of 12% is also fairly reasonable.

Following the firm bounce in price, Amlogic (Shanghai)Ltd's price-to-earnings (or "P/E") ratio of 43.6x might make it look like a sell right now compared to the market in China, where around half of the companies have P/E ratios below 29x and even P/E's below 18x are quite common. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Recent times have been pleasing for Amlogic (Shanghai)Ltd 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.

See our latest analysis for Amlogic (Shanghai)Ltd

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Amlogic (Shanghai)Ltd.

What Are Growth Metrics Telling Us About The High P/E?

The only time you'd be truly comfortable seeing a P/E as high as Amlogic (Shanghai)Ltd's is when the company's growth is on track to outshine the market.

If we review the last year of earnings growth, the company posted a terrific increase of 103%. The latest three year period has also seen an excellent 54% 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 28% per year as estimated by the seven analysts watching the company. With the market only predicted to deliver 19% each year, the company is positioned for a stronger earnings result.

With this information, we can see why Amlogic (Shanghai)Ltd 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.

What We Can Learn From Amlogic (Shanghai)Ltd's P/E?

Amlogic (Shanghai)Ltd's P/E is getting right up there since its shares have risen strongly. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of Amlogic (Shanghai)Ltd's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Amlogic (Shanghai)Ltd that you should be aware of.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.