Unpleasant Surprises Could Be In Store For China Resources Microelectronics Limited's (SHSE:688396) Shares

It's not a stretch to say that China Resources Microelectronics Limited's (SHSE:688396) price-to-earnings (or "P/E") ratio of 34.3x right now seems quite "middle-of-the-road" compared to the market in China, where the median P/E ratio is around 31x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

While the market has experienced earnings growth lately, China Resources Microelectronics' earnings have gone into reverse gear, which is not great. It might be that many expect the dour earnings performance to strengthen positively, which has kept the P/E from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.

Check out our latest analysis for China Resources Microelectronics

If you'd like to see what analysts are forecasting going forward, you should check out our free report on China Resources Microelectronics.

Does Growth Match The P/E?

The only time you'd be comfortable seeing a P/E like China Resources Microelectronics' is when the company's growth is tracking the market closely.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 43%. Even so, admirably EPS has lifted 34% in aggregate from three years ago, notwithstanding the last 12 months. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Shifting to the future, estimates from the seven analysts covering the company suggest earnings should grow by 14% over the next year. That's shaping up to be materially lower than the 36% growth forecast for the broader market.

With this information, we find it interesting that China Resources Microelectronics is trading at a fairly similar P/E to the market. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Key Takeaway

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.

We've established that China Resources Microelectronics currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

Plus, you should also learn about this 1 warning sign we've spotted with China Resources Microelectronics.

If these risks are making you reconsider your opinion on China Resources Microelectronics, 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.