There wouldn't be many who think Micro-Tech (Nanjing) Co.,Ltd's (SHSE:688029) price-to-earnings (or "P/E") ratio of 37.1x is worth a mention when the median P/E in China is similar at about 35x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.
With its earnings growth in positive territory compared to the declining earnings of most other companies, Micro-Tech (Nanjing)Ltd has been doing quite well of late. It might be that many expect the strong earnings performance to deteriorate like the rest, which has kept the P/E from rising. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.
See our latest analysis for Micro-Tech (Nanjing)Ltd
How Is Micro-Tech (Nanjing)Ltd's Growth Trending?
The only time you'd be comfortable seeing a P/E like Micro-Tech (Nanjing)Ltd's is when the company's growth is tracking the market closely.
If we review the last year of earnings growth, the company posted a terrific increase of 61%. Pleasingly, EPS has also lifted 71% in aggregate from three years ago, 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 seven analysts covering the company suggest earnings should grow by 20% over the next year. Meanwhile, the rest of the market is forecast to expand by 44%, which is noticeably more attractive.
With this information, we find it interesting that Micro-Tech (Nanjing)Ltd is trading at a fairly similar P/E to the market. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.
The Final Word
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.
Our examination of Micro-Tech (Nanjing)Ltd's analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E as much as we would have predicted. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.
Before you settle on your opinion, we've discovered 1 warning sign for Micro-Tech (Nanjing)Ltd that you should be aware of.
Of course, you might also be able to find a better stock than Micro-Tech (Nanjing)Ltd. 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.
