Market Might Still Lack Some Conviction On China Ecotek Corporation (TWSE:1535) Even After 26% Share Price Boost

China Ecotek Corporation (TWSE:1535) shares have continued their recent momentum with a 26% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 53%.

In spite of the firm bounce in price, given about half the companies in Taiwan have price-to-earnings ratios (or "P/E's") above 23x, you may still consider China Ecotek as an attractive investment with its 16.6x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

The recent earnings growth at China Ecotek would have to be considered satisfactory if not spectacular. One possibility is that the P/E is low because investors think this good earnings growth might actually underperform the broader market in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Check out our latest analysis for China Ecotek

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on China Ecotek will help you shine a light on its historical performance.

How Is China Ecotek's Growth Trending?

There's an inherent assumption that a company should underperform the market for P/E ratios like China Ecotek's to be considered reasonable.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 7.0% last year. This was backed up an excellent period prior to see EPS up by 182% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 22% shows it's noticeably more attractive on an annualised basis.

In light of this, it's peculiar that China Ecotek's P/E sits below the majority of other companies. It looks like most investors are not convinced the company can maintain its recent growth rates.

What We Can Learn From China Ecotek's P/E?

Despite China Ecotek's shares building up a head of steam, its P/E still lags most other companies. 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.

Our examination of China Ecotek revealed its three-year earnings trends aren't contributing to its P/E anywhere near as much as we would have predicted, given they look better than current market expectations. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. It appears many are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

You should always think about risks. Case in point, we've spotted 2 warning signs for China Ecotek you should be aware of, and 1 of them is a bit unpleasant.

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

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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.