Getting In Cheap On Far Eastern New Century Corporation (TWSE:1402) Is Unlikely

It's not a stretch to say that Far Eastern New Century Corporation's (TWSE:1402) price-to-earnings (or "P/E") ratio of 20.9x right now seems quite "middle-of-the-road" compared to the market in Taiwan, where the median P/E ratio is around 21x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

With earnings growth that's superior to most other companies of late, Far Eastern New Century has been doing relatively well. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

Check out our latest analysis for Far Eastern New Century

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What Are Growth Metrics Telling Us About The P/E?

The only time you'd be comfortable seeing a P/E like Far Eastern New Century's is when the company's growth is tracking the market closely.

Taking a look back first, we see that the company grew earnings per share by an impressive 57% last year. However, this wasn't enough as the latest three year period has seen a very unpleasant 16% drop in EPS in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 7.2% each year as estimated by the three analysts watching the company. With the market predicted to deliver 13% growth each year, the company is positioned for a weaker earnings result.

In light of this, it's curious that Far Eastern New Century's P/E sits in line with the majority of other companies. 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 Bottom Line On Far Eastern New Century's P/E

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

Our examination of Far Eastern New Century'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.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Far Eastern New Century that you should be aware of.

If these risks are making you reconsider your opinion on Far Eastern New Century, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.