Subdued Growth No Barrier To Circuit Fabology Microelectronics Equipment Co.,Ltd. (SHSE:688630) With Shares Advancing 26%

Circuit Fabology Microelectronics Equipment Co.,Ltd. (SHSE:688630) shares have continued their recent momentum with a 26% gain in the last month alone. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 5.9% 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 45.3x 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 36x and even P/E's below 21x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Recent times have been pleasing for Circuit Fabology Microelectronics EquipmentLtd as its earnings have risen in spite of the market's earnings going into reverse. 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.

View our latest analysis for Circuit Fabology Microelectronics EquipmentLtd

Want the full picture on analyst estimates for the company? Then our free report on Circuit Fabology Microelectronics EquipmentLtd will help you uncover what's on the horizon.

Is There Enough Growth For Circuit Fabology Microelectronics EquipmentLtd?

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

If we review the last year of earnings growth, the company posted a terrific increase of 36%. However, this wasn't enough as the latest three year period has seen a very unpleasant 84% drop in EPS in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Shifting to the future, estimates from the nine analysts covering the company suggest earnings should grow by 43% over the next year. Meanwhile, the rest of the market is forecast to expand by 41%, which is not materially different.

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

The Key Takeaway

The large bounce in Circuit Fabology Microelectronics EquipmentLtd's shares has lifted the company's P/E to a fairly high level. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Circuit Fabology Microelectronics EquipmentLtd currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

It is also worth noting that we have found 3 warning signs for Circuit Fabology Microelectronics EquipmentLtd (1 shouldn't be ignored!) that you need to take into consideration.

If you're unsure about the strength of Circuit Fabology Microelectronics EquipmentLtd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.