Shihlin Electric & Engineering Corp.'s (TWSE:1503) Share Price Is Still Matching Investor Opinion Despite 29% Slump

The Shihlin Electric & Engineering Corp. (TWSE:1503) share price has fared very poorly over the last month, falling by a substantial 29%. Looking at the bigger picture, even after this poor month the stock is up 58% in the last year.

Although its price has dipped substantially, Shihlin Electric & Engineering's price-to-earnings (or "P/E") ratio of 39.8x might still make it look like a strong sell right now compared to the market in Taiwan, where around half of the companies have P/E ratios below 20x and even P/E's below 14x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

Shihlin Electric & Engineering certainly has been doing a good job lately as it's been growing earnings more than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.

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Is There Enough Growth For Shihlin Electric & Engineering?

Shihlin Electric & Engineering's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

Retrospectively, the last year delivered an exceptional 31% gain to the company's bottom line. The latest three year period has also seen an excellent 63% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the dual analysts covering the company suggest earnings should grow by 55% over the next year. With the market only predicted to deliver 24%, the company is positioned for a stronger earnings result.

With this information, we can see why Shihlin Electric & Engineering is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What We Can Learn From Shihlin Electric & Engineering's P/E?

A significant share price dive has done very little to deflate Shihlin Electric & Engineering's very lofty P/E. 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.

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. Unless these conditions change, they will continue to provide strong support to the share price.

It is also worth noting that we have found 1 warning sign for Shihlin Electric & Engineering that you need to take into consideration.

If these risks are making you reconsider your opinion on Shihlin Electric & Engineering, 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.

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