What Allis Electric Co.,Ltd.'s (TWSE:1514) 26% Share Price Gain Is Not Telling You

Allis Electric Co.,Ltd. (TWSE:1514) shareholders have had their patience rewarded with a 26% share price jump in the last month. The last month tops off a massive increase of 143% in the last year.

After such a large jump in price, Allis ElectricLtd may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 45x, since almost half of all companies in Taiwan have P/E ratios under 22x and even P/E's lower than 16x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Allis ElectricLtd has been doing quite well of late. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Allis ElectricLtd

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

Does Growth Match The High P/E?

In order to justify its P/E ratio, Allis ElectricLtd would need to produce outstanding growth well in excess of the market.

If we review the last year of earnings growth, the company posted a terrific increase of 58%. Pleasingly, EPS has also lifted 137% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 1.4% during the coming year according to the four analysts following the company. With the market predicted to deliver 24% growth , the company is positioned for a weaker earnings result.

In light of this, it's alarming that Allis ElectricLtd's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

What We Can Learn From Allis ElectricLtd's P/E?

The strong share price surge has got Allis ElectricLtd's P/E rushing to great heights as well. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Allis ElectricLtd currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

You need to take note of risks, for example - Allis ElectricLtd has 2 warning signs (and 1 which is potentially serious) we think you should know about.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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