Further Upside For Roundtop Machinery Industries Co., Ltd. (TWSE:1540) Shares Could Introduce Price Risks After 49% Bounce

Roundtop Machinery Industries Co., Ltd. (TWSE:1540) shares have continued their recent momentum with a 49% gain in the last month alone. The annual gain comes to 143% following the latest surge, making investors sit up and take notice.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about Roundtop Machinery Industries' P/E ratio of 22.2x, since the median price-to-earnings (or "P/E") ratio in Taiwan is also close to 21x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

Recent times have been quite advantageous for Roundtop Machinery Industries as its earnings have been rising very briskly. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If that doesn't eventuate, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

See our latest analysis for Roundtop Machinery Industries

Although there are no analyst estimates available for Roundtop Machinery Industries, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Is There Some Growth For Roundtop Machinery Industries?

There's an inherent assumption that a company should be matching the market for P/E ratios like Roundtop Machinery Industries' to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 69% last year. The strong recent performance means it was also able to grow EPS by 4,495% 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.

Comparing that to the market, which is only predicted to deliver 24% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised earnings results.

In light of this, it's curious that Roundtop Machinery Industries' P/E sits in line with the majority of other companies. Apparently some shareholders believe the recent performance is at its limits and have been accepting lower selling prices.

The Bottom Line On Roundtop Machinery Industries' P/E

Roundtop Machinery Industries' stock has a lot of momentum behind it lately, which has brought its P/E level with the market. 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.

Our examination of Roundtop Machinery Industries revealed its three-year earnings trends aren't contributing to its P/E as much as we would have predicted, given they look better than current market expectations. There could be some unobserved threats to earnings preventing the P/E ratio from matching this positive performance. It appears some are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

Before you settle on your opinion, we've discovered 2 warning signs for Roundtop Machinery Industries (1 shouldn't be ignored!) that you should be aware of.

If you're unsure about the strength of Roundtop Machinery Industries' 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.