Earnings Not Telling The Story For Circuit Fabology Microelectronics Equipment Co.,Ltd. (SHSE:688630) After Shares Rise 25%

Those holding Circuit Fabology Microelectronics Equipment Co.,Ltd. (SHSE:688630) shares would be relieved that the share price has rebounded 25% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 16% in the last twelve months.

After such a large jump in price, Circuit Fabology Microelectronics EquipmentLtd's price-to-earnings (or "P/E") ratio of 50.7x 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. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Circuit Fabology Microelectronics EquipmentLtd certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. If not, then existing shareholders might be a little nervous about the viability of the share price.

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How Is Circuit Fabology Microelectronics EquipmentLtd's Growth Trending?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Circuit Fabology Microelectronics EquipmentLtd's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 28% last year. The strong recent performance means it was also able to grow EPS by 77% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next year should generate growth of 41% as estimated by the nine analysts watching the company. With the market predicted to deliver 41% growth , the company is positioned for a comparable earnings result.

In light of this, it's curious that Circuit Fabology Microelectronics EquipmentLtd's P/E sits above the majority of other companies. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

The Final Word

Shares in Circuit Fabology Microelectronics EquipmentLtd have built up some good momentum lately, which has really inflated its P/E. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of Circuit Fabology Microelectronics EquipmentLtd's analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

You should always think about risks. Case in point, we've spotted 1 warning sign for Circuit Fabology Microelectronics EquipmentLtd you should be aware of.

You might be able to find a better investment than Circuit Fabology Microelectronics EquipmentLtd. 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.