Giantec Semiconductor Corporation's (SHSE:688123) Stock Retreats 25% But Earnings Haven't Escaped The Attention Of Investors

Giantec Semiconductor Corporation (SHSE:688123) shares have had a horrible month, losing 25% after a relatively good period beforehand. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 10% share price drop.

Although its price has dipped substantially, Giantec Semiconductor may still be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 59.7x, since almost half of all companies in China have P/E ratios under 27x and even P/E's lower than 16x 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.

Giantec Semiconductor hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. 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.

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Does Growth Match The High P/E?

The only time you'd be truly comfortable seeing a P/E as steep as Giantec Semiconductor's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered a frustrating 60% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 20% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the sole analyst covering the company suggest earnings should grow by 66% per year over the next three years. That's shaping up to be materially higher than the 24% per year growth forecast for the broader market.

With this information, we can see why Giantec Semiconductor 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 Final Word

A significant share price dive has done very little to deflate Giantec Semiconductor's very lofty P/E. 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.

We've established that Giantec Semiconductor maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. 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.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Giantec Semiconductor that you should be aware of.

If these risks are making you reconsider your opinion on Giantec Semiconductor, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.