After Leaping 30% Soitec SA (EPA:SOI) Shares Are Not Flying Under The Radar

Those holding Soitec SA (EPA:SOI) shares would be relieved that the share price has rebounded 30% 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 48% in the last twelve months.

After such a large jump in price, given close to half the companies in France have price-to-earnings ratios (or "P/E's") below 14x, you may consider Soitec as a stock to avoid entirely with its 27.6x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

Recent times haven't been advantageous for Soitec as its earnings have been falling quicker 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 Soitec

Want the full picture on analyst estimates for the company? Then our free report on Soitec will help you uncover what's on the horizon.

Is There Enough Growth For Soitec?

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

Retrospectively, the last year delivered a frustrating 49% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 18% overall. 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 35% each year as estimated by the analysts watching the company. With the market only predicted to deliver 14% each year, the company is positioned for a stronger earnings result.

With this information, we can see why Soitec is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Soitec's P/E

Shares in Soitec have built up some good momentum lately, which has really inflated its P/E. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Soitec maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. 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.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Soitec, and understanding them should be part of your investment process.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.