When close to half the companies in China have price-to-earnings ratios (or "P/E's") below 29x, you may consider Macmic Science&Technology Co.,Ltd. (SHSE:688711) as a stock to potentially avoid with its 41.8x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.
Macmic Science&TechnologyLtd 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. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors' willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
Is There Enough Growth For Macmic Science&TechnologyLtd?
There's an inherent assumption that a company should outperform the market for P/E ratios like Macmic Science&TechnologyLtd's to be considered reasonable.
Retrospectively, the last year delivered an exceptional 47% gain to the company's bottom line. Pleasingly, EPS has also lifted 206% 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.
Looking ahead now, EPS is anticipated to climb by 116% during the coming year according to the five analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 41%, which is noticeably less attractive.
With this information, we can see why Macmic Science&TechnologyLtd is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.
The Final Word
Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
We've established that Macmic Science&TechnologyLtd maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. 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.
Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for Macmic Science&TechnologyLtd 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 Macmic Science&TechnologyLtd. 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.