The Telink Semiconductor(Shanghai)Co.,Ltd. (SHSE:688591) share price has done very well over the last month, posting an excellent gain of 41%. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 17% in the last twelve months.
After such a large jump in price, given close to half the companies in China have price-to-earnings ratios (or "P/E's") below 34x, you may consider Telink Semiconductor(Shanghai)Co.Ltd as a stock to avoid entirely with its 79.2x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.
As an illustration, earnings have deteriorated at Telink Semiconductor(Shanghai)Co.Ltd over the last year, which is not ideal at all. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
What Are Growth Metrics Telling Us About The High P/E?
There's an inherent assumption that a company should far outperform the market for P/E ratios like Telink Semiconductor(Shanghai)Co.Ltd's to be considered reasonable.
Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 11%. As a result, earnings from three years ago have also fallen 39% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.
In contrast to the company, the rest of the market is expected to grow by 38% over the next year, which really puts the company's recent medium-term earnings decline into perspective.
With this information, we find it concerning that Telink Semiconductor(Shanghai)Co.Ltd is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.
The Bottom Line On Telink Semiconductor(Shanghai)Co.Ltd's P/E
The strong share price surge has got Telink Semiconductor(Shanghai)Co.Ltd's P/E rushing to great heights as well. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.
Our examination of Telink Semiconductor(Shanghai)Co.Ltd revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.
It is also worth noting that we have found 1 warning sign for Telink Semiconductor(Shanghai)Co.Ltd that you need to take into consideration.
Of course, you might also be able to find a better stock than Telink Semiconductor(Shanghai)Co.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.
