Maxscend Microelectronics Company Limited's (SZSE:300782) P/E Is On The Mark

When close to half the companies in China have price-to-earnings ratios (or "P/E's") below 29x, you may consider Maxscend Microelectronics Company Limited (SZSE:300782) as a stock to avoid entirely with its 59.2x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Maxscend Microelectronics 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Maxscend Microelectronics

Keen to find out how analysts think Maxscend Microelectronics' future stacks up against the industry? In that case, our free report is a great place to start.

Is There Enough Growth For Maxscend Microelectronics?

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

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 43%. This means it has also seen a slide in earnings over the longer-term as EPS is down 1.7% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Turning to the outlook, the next three years should generate growth of 62% each year as estimated by the analysts watching the company. That's shaping up to be materially higher than the 22% per annum growth forecast for the broader market.

In light of this, it's understandable that Maxscend Microelectronics' P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Key Takeaway

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of Maxscend 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. It's hard to see the share price falling strongly in the near future under these circumstances.

Before you settle on your opinion, we've discovered 1 warning sign for Maxscend Microelectronics that you should be aware of.

You might be able to find a better investment than Maxscend Microelectronics. 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.