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ACM Research, Inc.'s (NASDAQ:ACMR) price-to-earnings (or "P/E") ratio of 77.5x might make it look like a strong sell right now compared to the market in the United States, where around half of the companies have P/E ratios below 16x and even P/E's below 9x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.
Recent times have been advantageous for ACM Research as its earnings have been rising faster than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.
How Does ACM Research's P/E Ratio Compare To Its Industry Peers?
We'd like to see if P/E's within ACM Research's industry might provide some colour around the company's particularly high P/E ratio. The image below shows that the Semiconductor industry as a whole also has a P/E ratio significantly higher than the market. So this certainly goes a fair way towards explaining the company's ratio right now. In the context of the Semiconductor industry's current setting, most of its constituents' P/E's' P/E's would be expected to be raised up greatly. Still, the strength of the company's earnings will most likely determine where its P/E shall sit.
Want the full picture on analyst estimates for the company? Then our free report on ACM Research will help you uncover what's on the horizon.
Does Growth Match The High P/E?
In order to justify its P/E ratio, ACM Research would need to produce outstanding growth well in excess of the market.
Taking a look back first, we see that the company grew earnings per share by an impressive 54% last year. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.
Shifting to the future, estimates from the eight analysts covering the company are not great, suggesting earnings should decline by 7.3% over the next year. Meanwhile, the market is forecast to moderate by 11%, which indicates the company should perform better regardless.
In light of this, it's understandable that ACM Research's P/E sits above the majority of other companies. Nonetheless, there's no guarantee the P/E has found a floor yet with earnings going in reverse. Maintaining these prices will be difficult to achieve as the weak outlook is likely to weigh down the shares eventually.
What We Can Learn From ACM Research's P/E?
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 ACM Research maintains its high P/E on the strength of its earnings forecast not being as bad as the struggling market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Our only concern is whether its earnings trajectory can keep outperforming under these tough market conditions. Otherwise, it's hard to see the share price falling strongly in the near future under the current growth expectations.
It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with ACM Research, and understanding them should be part of your investment process.
If you're unsure about the strength of ACM Research's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
This article by Simply Wall St is general in nature. 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.
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