Investors Still Waiting For A Pull Back In Circuit Fabology Microelectronics Equipment Co.,Ltd. (SHSE:688630)

With a price-to-earnings (or "P/E") ratio of 35.4x Circuit Fabology Microelectronics Equipment Co.,Ltd. (SHSE:688630) may be sending bearish signals at the moment, given that almost half of all companies in China have P/E ratios under 28x and even P/E's lower than 17x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Recent times have been pleasing for Circuit Fabology Microelectronics EquipmentLtd 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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How Is Circuit Fabology Microelectronics EquipmentLtd's Growth Trending?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 26% last year. Pleasingly, EPS has also lifted 50% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 29% per year as estimated by the ten analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 19% each year, which is noticeably less attractive.

With this information, we can see why Circuit Fabology Microelectronics EquipmentLtd 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.

What We Can Learn From Circuit Fabology Microelectronics EquipmentLtd's P/E?

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of Circuit Fabology Microelectronics EquipmentLtd's 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 is also worth noting that we have found 2 warning signs for Circuit Fabology Microelectronics EquipmentLtd (1 is potentially serious!) that you need to take into consideration.

You might be able to find a better investment than Circuit Fabology Microelectronics EquipmentLtd. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.