What Union Semiconductor (Hefei) Co., Ltd.'s (SHSE:688403) 25% Share Price Gain Is Not Telling You

Union Semiconductor (Hefei) Co., Ltd. (SHSE:688403) shares have continued their recent momentum with a 25% gain in the last month alone. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 12% in the last twelve months.

Since its price has surged higher, given around half the companies in China have price-to-earnings ratios (or "P/E's") below 34x, you may consider Union Semiconductor (Hefei) as a stock to potentially avoid with its 50.1x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

For example, consider that Union Semiconductor (Hefei)'s financial performance has been poor lately as its earnings have been in decline. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Union Semiconductor (Hefei)

Although there are no analyst estimates available for Union Semiconductor (Hefei), take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Union Semiconductor (Hefei)'s Growth Trending?

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

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 12%. This means it has also seen a slide in earnings over the longer-term as EPS is down 11% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

In contrast to the company, the rest of the market is expected to grow by 39% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

With this information, we find it concerning that Union Semiconductor (Hefei) is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Key Takeaway

Union Semiconductor (Hefei)'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.

Our examination of Union Semiconductor (Hefei) revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

It is also worth noting that we have found 2 warning signs for Union Semiconductor (Hefei) that you need to take into consideration.

You might be able to find a better investment than Union Semiconductor (Hefei). 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.