Microchip Technology Incorporated (NASDAQ:MCHP) Not Flying Under The Radar

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 18x, you may consider Microchip Technology Incorporated (NASDAQ:MCHP) as a stock to avoid entirely with its 40x 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.

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

View our latest analysis for Microchip Technology

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How Is Microchip Technology's Growth Trending?

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

Retrospectively, the last year delivered a frustrating 69% decrease to the company's bottom line. This has soured the latest three-year period, which nevertheless managed to deliver a decent 22% overall rise in EPS. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 32% per annum as estimated by the analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 11% per year, which is noticeably less attractive.

In light of this, it's understandable that Microchip Technology'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 Microchip Technology's 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 Microchip Technology maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Microchip Technology that you need to be mindful of.

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.