Market Participants Recognise Shanghai Fudan Microelectronics Group Company Limited's (HKG:1385) Earnings Pushing Shares 30% Higher

Despite an already strong run, Shanghai Fudan Microelectronics Group Company Limited (HKG:1385) shares have been powering on, with a gain of 30% in the last thirty days. The last month tops off a massive increase of 166% in the last year.

Since its price has surged higher, given close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") below 10x, you may consider Shanghai Fudan Microelectronics Group as a stock to avoid entirely with its 37.7x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

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Shanghai Fudan Microelectronics Group hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.

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

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

Retrospectively, the last year delivered a frustrating 20% decrease to the company's bottom line. This has erased any of its gains during the last three years, with practically no change in EPS being achieved in total. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Looking ahead now, EPS is anticipated to climb by 24% per year during the coming three years according to the dual analysts following the company. That's shaping up to be materially higher than the 13% per year growth forecast for the broader market.

In light of this, it's understandable that Shanghai Fudan Microelectronics Group's 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.

What We Can Learn From Shanghai Fudan Microelectronics Group's P/E?

The strong share price surge has got Shanghai Fudan Microelectronics Group's P/E rushing to great heights as well. 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.

We've established that Shanghai Fudan Microelectronics Group 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.

Many other vital risk factors can be found on the company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Shanghai Fudan Microelectronics Group with six simple checks.

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.