Maxscend Microelectronics Company Limited's (SZSE:300782) Share Price Could Signal Some Risk

When close to half the companies in China have price-to-earnings ratios (or "P/E's") below 28x, you may consider Maxscend Microelectronics Company Limited (SZSE:300782) as a stock to potentially avoid with its 36.1x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Recent times have been advantageous for Maxscend Microelectronics as its earnings have been rising faster than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Maxscend Microelectronics

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Maxscend Microelectronics.

What Are Growth Metrics Telling Us About The High P/E?

The only time you'd be truly comfortable seeing a P/E as high as Maxscend Microelectronics' is when the company's growth is on track to outshine the market.

If we review the last year of earnings growth, the company posted a terrific increase of 66%. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 17% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 20% per annum as estimated by the analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 25% each year, which is noticeably more attractive.

In light of this, it's alarming that Maxscend Microelectronics' P/E sits above the majority of other companies. 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 Final Word

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Maxscend Microelectronics currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Maxscend Microelectronics that you should be aware of.

If these risks are making you reconsider your opinion on Maxscend Microelectronics, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.

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