Wuxi ETEK Microelectronics Co.,Ltd. (SHSE:688601) shareholders would be excited to see that the share price has had a great month, posting a 34% gain and recovering from prior weakness. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 2.8% in the last twelve months.

Although its price has surged higher, Wuxi ETEK MicroelectronicsLtd's price-to-earnings (or "P/E") ratio of 27.7x might still make it look like a buy right now compared to the market in China, where around half of the companies have P/E ratios above 34x and even P/E's above 65x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Wuxi ETEK MicroelectronicsLtd certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Is There Any Growth For Wuxi ETEK MicroelectronicsLtd?

There's an inherent assumption that a company should underperform the market for P/E ratios like Wuxi ETEK MicroelectronicsLtd's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 143%. The latest three year period has also seen an excellent 60% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Shifting to the future, estimates from the sole analyst covering the company suggest earnings should grow by 22% per annum over the next three years. Meanwhile, the rest of the market is forecast to only expand by 19% per annum, which is noticeably less attractive.

In light of this, it's peculiar that Wuxi ETEK MicroelectronicsLtd's P/E sits below the majority of other companies. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

What We Can Learn From Wuxi ETEK MicroelectronicsLtd's P/E?

Wuxi ETEK MicroelectronicsLtd's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Wuxi ETEK MicroelectronicsLtd currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. It appears many are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

Before you settle on your opinion, we've discovered 2 warning signs for Wuxi ETEK MicroelectronicsLtd that you should be aware of.

You might be able to find a better investment than Wuxi ETEK MicroelectronicsLtd. 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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