Why Investors Shouldn't Be Surprised By Maxscend Microelectronics Company Limited's (SZSE:300782) 62% Share Price Surge

Maxscend Microelectronics Company Limited (SZSE:300782) shareholders would be excited to see that the share price has had a great month, posting a 62% gain and recovering from prior weakness. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 10% over that time.

Following the firm bounce in price, Maxscend Microelectronics may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 49.5x, since almost half of all companies in China have P/E ratios under 33x and even P/E's lower than 19x 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 have been pleasing for Maxscend Microelectronics as its earnings have risen in spite of the market's earnings going into reverse. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. If not, then existing shareholders might be a little nervous about the viability of the share price.

View 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.

How Is Maxscend Microelectronics' Growth Trending?

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 62%. Still, incredibly EPS has fallen 37% in total from three years ago, which is quite disappointing. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Looking ahead now, EPS is anticipated to climb by 23% per annum during the coming three years according to the analysts following the company. With the market only predicted to deliver 18% per annum, the company is positioned for a stronger earnings result.

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 Final Word

The large bounce in Maxscend Microelectronics' shares has lifted the company's P/E to a fairly high level. 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.

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. 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 2 warning signs with Maxscend Microelectronics, and understanding them should be part of your investment process.

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.

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

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.