Market Participants Recognise Shihlin Electric & Engineering Corp.'s (TWSE:1503) Earnings Pushing Shares 48% Higher

Shihlin Electric & Engineering Corp. (TWSE:1503) shares have continued their recent momentum with a 48% gain in the last month alone. The annual gain comes to 118% following the latest surge, making investors sit up and take notice.

After such a large jump in price, given close to half the companies in Taiwan have price-to-earnings ratios (or "P/E's") below 21x, you may consider Shihlin Electric & Engineering as a stock to avoid entirely with its 39.3x 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.

Recent times have been pleasing for Shihlin Electric & Engineering as its earnings have risen in spite of the market's earnings going into reverse. 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. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for Shihlin Electric & Engineering

Keen to find out how analysts think Shihlin Electric & Engineering's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Enough Growth For Shihlin Electric & Engineering?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Shihlin Electric & Engineering's to be considered reasonable.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 13% last year. The latest three year period has also seen an excellent 39% overall rise in EPS, aided somewhat by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Shifting to the future, estimates from the four analysts covering the company suggest earnings should grow by 37% over the next year. With the market only predicted to deliver 22%, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Shihlin Electric & Engineering's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Bottom Line On Shihlin Electric & Engineering's P/E

The strong share price surge has got Shihlin Electric & Engineering's P/E rushing to great heights as well. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Shihlin Electric & Engineering's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Shihlin Electric & Engineering that you need to be mindful of.

If you're unsure about the strength of Shihlin Electric & Engineering's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.