Shanghai Fullhan Microelectronics Co., Ltd.'s (SZSE:300613) Price In Tune With Earnings

With a price-to-earnings (or "P/E") ratio of 36x Shanghai Fullhan Microelectronics Co., Ltd. (SZSE:300613) may be sending bearish signals at the moment, given that almost half of all companies in China have P/E ratios under 29x and even P/E's lower than 18x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Recent times haven't been advantageous for Shanghai Fullhan Microelectronics as its earnings have been falling quicker than most other companies. It might be that many expect the dismal earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Shanghai Fullhan Microelectronics

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Is There Enough Growth For Shanghai Fullhan Microelectronics?

The only time you'd be truly comfortable seeing a P/E as high as Shanghai Fullhan Microelectronics' 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 48%. Still, the latest three year period has seen an excellent 399% overall rise in EPS, in spite of its unsatisfying short-term performance. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 95% during the coming year according to the dual analysts following the company. That's shaping up to be materially higher than the 41% growth forecast for the broader market.

In light of this, it's understandable that Shanghai Fullhan Microelectronics' P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From Shanghai Fullhan Microelectronics' P/E?

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.

As we suspected, our examination of Shanghai Fullhan Microelectronics' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Shanghai Fullhan Microelectronics, and understanding should be part of your investment process.

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

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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.