Already performing well, Asia Optical Co. Ltd. (TWSE:3019) shares are gaining momentum, up 42% in the past 30 days, with the annualized gain over the past 30 days being a very steep 96%.
With its share price soaring, Asia Optical, with a P/E ratio of 33.4, could be considered a stock to avoid altogether, given that nearly half of Taiwanese companies have a price-to-earnings (or “P/E”) ratio of less than 21. That said, we need to dig a little deeper to determine whether there is a rational basis for the sky-high P/E.
Asia Optical has been doing well lately, with earnings growing at a solid pace. Many expect the company to outperform most other companies going forward, which may increase investors' willingness to pay a premium for the stock. We can only hope so; if not, you're paying a pretty high price for no real reason.
View our latest analysis for Asia Optical
TWSE:3019 Price to Earnings Ratio vs Industry 26 August 2024 While there are no analyst forecasts, you can check this free report on Asia Optical's earnings, revenue and cash flow to see how recent trends could impact the company's future.
Is there enough growth in Asia Optical?
For Asia Optical to justify its P/E ratio, it would need to achieve significant growth that far exceeds the market.
Looking back, the company grew earnings per share by 15% last year, but EPS was barely up compared to three years ago in total, which isn't ideal, so shareholders probably weren't too happy with the shaky medium-term growth rate.
The company's downward trend based on recent mid-term earnings results looks grim when compared to a market that is expected to grow 25% over the next 12 months.
With this in mind, it is worrying that Asia Optical's P/E is higher than the majority of other companies. It appears that most investors are ignoring the recent poor growth rate and hoping for an improvement in the company's business prospects. If the P/E were to fall as much as the recent negative growth rate, existing shareholders would likely be disappointed in the future.
Key Takeaways
Asia Optical's stock has been experiencing strong momentum recently, driving its price-to-earnings ratio (P/E) to a strong increase. While P/E ratios are considered poor measures of value in certain industries, they can be a strong indicator of business sentiment.
Our research into Asia Optical reveals that shrinking earnings over the medium term are not impacting the company's high P/E as much as expected, given that the market is expected to grow. If earnings recede and fall short of market expectations, there is a risk that the share price will fall, further reducing the high P/E. If the recent medium-term earnings trend continues, shareholders' investments will be at significant risk and potential investors will be at risk of paying an excessive premium.
Don't forget that there could be other risks too – for example, we've identified 1 warning sign for Asia Optical you should be aware of.
Of course, you might find a better stock than Asia Optical, so we suggest you take a look at this free collection of other companies with reasonable P/E ratios and strong earnings growth.
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This article by Simply Wall St is of general nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology, and our articles are not intended as financial advice. It is not a recommendation to buy or sell a stock, and does not take into account your objectives or financial situation. We aim to provide long-term analysis driven by fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned herein.
