Changzhou Galaxy Century Microelectronics Co.,Ltd.'s (SHSE:688689) 55% Price Boost Is Out Of Tune With Earnings

Changzhou Galaxy Century Microelectronics Co.,Ltd. (SHSE:688689) shares have had a really impressive month, gaining 55% after a shaky period beforehand. Notwithstanding the latest gain, the annual share price return of 2.8% isn't as impressive.

Following the firm bounce in price, given around half the companies in China have price-to-earnings ratios (or "P/E's") below 33x, you may consider Changzhou Galaxy Century MicroelectronicsLtd as a stock to potentially avoid with its 48.4x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Changzhou Galaxy Century MicroelectronicsLtd has been doing a good job lately as it's been growing earnings at a solid pace. One possibility is that the P/E is high because investors think this respectable earnings growth will be 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 Changzhou Galaxy Century MicroelectronicsLtd

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Changzhou Galaxy Century MicroelectronicsLtd's earnings, revenue and cash flow.

Is There Enough Growth For Changzhou Galaxy Century MicroelectronicsLtd?

There's an inherent assumption that a company should outperform the market for P/E ratios like Changzhou Galaxy Century MicroelectronicsLtd's to be considered reasonable.

Retrospectively, the last year delivered a decent 11% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen an unpleasant 39% overall drop in EPS. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

In contrast to the company, the rest of the market is expected to grow by 37% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

In light of this, it's alarming that Changzhou Galaxy Century MicroelectronicsLtd's P/E sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. 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 Final Word

Changzhou Galaxy Century MicroelectronicsLtd shares have received a push in the right direction, but its P/E is elevated too. 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.

We've established that Changzhou Galaxy Century MicroelectronicsLtd currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. 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. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

There are also other vital risk factors to consider and we've discovered 4 warning signs for Changzhou Galaxy Century MicroelectronicsLtd (2 are significant!) that you should be aware of before investing here.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.