With a price-to-earnings (or "P/E") ratio of 17.7x Unigroup Guoxin Microelectronics Co., Ltd. (SZSE:002049) may be sending bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 27x and even P/E's higher than 48x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.
Recent times have been pleasing for Unigroup Guoxin Microelectronics as its earnings have risen in spite of the market's earnings going into reverse. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
Is There Any Growth For Unigroup Guoxin Microelectronics?
In order to justify its P/E ratio, Unigroup Guoxin Microelectronics would need to produce sluggish growth that's trailing the market.
Taking a look back first, we see that the company managed to grow earnings per share by a handy 3.6% last year. Pleasingly, EPS has also lifted 264% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.
Shifting to the future, estimates from the eight analysts covering the company suggest earnings should grow by 42% over the next year. That's shaping up to be similar to the 41% growth forecast for the broader market.
With this information, we find it odd that Unigroup Guoxin Microelectronics is trading at a P/E lower than the market. It may be that most investors are not convinced the company can achieve future growth expectations.
The Final Word
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 Unigroup Guoxin Microelectronics currently trades on a lower than expected P/E since its forecast growth is in line with the wider market. When we see an average earnings outlook with market-like growth, we assume potential risks are what might be placing pressure on the P/E ratio. It appears some are indeed anticipating earnings instability, because these conditions should normally provide more support to the share price.
A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for Unigroup Guoxin Microelectronics with six simple checks will allow you to discover any risks that could be an issue.
Of course, you might also be able to find a better stock than Unigroup Guoxin Microelectronics. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.
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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.