TECO Electric & Machinery Co., Ltd. (TWSE:1504) Could Be Riskier Than It Looks

It's not a stretch to say that TECO Electric & Machinery Co., Ltd.'s (TWSE:1504) price-to-earnings (or "P/E") ratio of 20x right now seems quite "middle-of-the-road" compared to the market in Taiwan, where the median P/E ratio is around 21x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

While the market has experienced earnings growth lately, TECO Electric & Machinery's earnings have gone into reverse gear, which is not great. It might be that many expect the dour earnings performance to strengthen positively, which has kept the P/E from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.

View our latest analysis for TECO Electric & Machinery

If you'd like to see what analysts are forecasting going forward, you should check out our free report on TECO Electric & Machinery.

How Is TECO Electric & Machinery's Growth Trending?

In order to justify its P/E ratio, TECO Electric & Machinery would need to produce growth that's similar to the market.

Retrospectively, the last year delivered a frustrating 17% decrease to the company's bottom line. Regardless, EPS has managed to lift by a handy 13% in aggregate from three years ago, thanks to the earlier period of growth. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been mostly respectable for the company.

Shifting to the future, estimates from the four analysts covering the company suggest earnings should grow by 28% over the next year. Meanwhile, the rest of the market is forecast to only expand by 24%, which is noticeably less attractive.

With this information, we find it interesting that TECO Electric & Machinery is trading at a fairly similar P/E to the market. Apparently some shareholders are skeptical of the forecasts and have been accepting lower selling prices.

The Final Word

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that TECO Electric & Machinery currently trades on a lower than expected P/E since its forecast growth is higher than the wider market. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing pressure on the P/E ratio. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with TECO Electric & Machinery, and understanding should be part of your investment process.

You might be able to find a better investment than TECO Electric & Machinery. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.