Subdued Growth No Barrier To Wuxi Taclink Optoelectronics Technology Co., Ltd. (SHSE:688205) With Shares Advancing 27%

Those holding Wuxi Taclink Optoelectronics Technology Co., Ltd. (SHSE:688205) shares would be relieved that the share price has rebounded 27% 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 13% in the last twelve months.

Following the firm bounce in price, Wuxi Taclink Optoelectronics Technology's price-to-earnings (or "P/E") ratio of 52.6x 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. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Wuxi Taclink Optoelectronics Technology has been struggling lately as its earnings have declined faster than most other companies. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. If not, then existing shareholders may be very nervous about the viability of the share price.

Check out our latest analysis for Wuxi Taclink Optoelectronics Technology

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Wuxi Taclink Optoelectronics Technology.

Does Growth Match The High P/E?

Wuxi Taclink Optoelectronics Technology's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 25%. As a result, earnings from three years ago have also fallen 57% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next year should generate growth of 37% as estimated by the sole analyst watching the company. That's shaping up to be materially lower than the 41% growth forecast for the broader market.

With this information, we find it concerning that Wuxi Taclink Optoelectronics Technology is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

The Key Takeaway

Wuxi Taclink Optoelectronics Technology's P/E is flying high just like its stock has during the last month. 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 Wuxi Taclink Optoelectronics Technology's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Wuxi Taclink Optoelectronics Technology you should know about.

You might be able to find a better investment than Wuxi Taclink Optoelectronics Technology. 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.