Roundtop Machinery Industries Co., Ltd. (TWSE:1540) Soars 29% But It's A Story Of Risk Vs Reward

Roundtop Machinery Industries Co., Ltd. (TWSE:1540) shares have had a really impressive month, gaining 29% after a shaky period beforehand. The last month tops off a massive increase of 126% in the last year.

Although its price has surged higher, it's still not a stretch to say that Roundtop Machinery Industries' price-to-earnings (or "P/E") ratio of 21.9x right now seems quite "middle-of-the-road" compared to the market in Taiwan, where the median P/E ratio is around 22x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

Roundtop Machinery Industries certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. The P/E is probably moderate because investors think this strong earnings growth might not be enough to outperform 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 not quite in favour.

Check out 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.

Does Growth Match The P/E?

The only time you'd be comfortable seeing a P/E like Roundtop Machinery Industries' is when the company's growth is tracking the market closely.

If we review the last year of earnings growth, the company posted a terrific increase of 77%. Pleasingly, EPS has also lifted 920% 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.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 24% shows it's noticeably more attractive on an annualised basis.

With this information, we find it interesting that Roundtop Machinery Industries is trading at a fairly similar P/E to the market. It may be that most investors are not convinced the company can maintain its recent growth rates.

What We Can Learn From Roundtop Machinery Industries' P/E?

Roundtop Machinery Industries appears to be back in favour with a solid price jump getting its P/E back in line with 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 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. When we see strong earnings 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 if recent medium-term earnings trends continue, but investors seem to think future earnings could see some volatility.

You should always think about risks. Case in point, we've spotted 2 warning signs for Roundtop Machinery Industries you should be aware of.

Of course, you might also be able to find a better stock than Roundtop Machinery Industries. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.