China Wire & Cable Co., Ltd.'s (TWSE:1603) Share Price Boosted 30% But Its Business Prospects Need A Lift Too

China Wire & Cable Co., Ltd. (TWSE:1603) shares have had a really impressive month, gaining 30% after a shaky period beforehand. Looking back a bit further, it's encouraging to see the stock is up 65% in the last year.

Even after such a large jump in price, China Wire & Cable may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 15.8x, since almost half of all companies in Taiwan have P/E ratios greater than 23x and even P/E's higher than 39x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

China Wire & Cable certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for China Wire & Cable

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How Is China Wire & Cable's Growth Trending?

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

Retrospectively, the last year delivered an exceptional 44% gain to the company's bottom line. The latest three year period has also seen an excellent 46% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

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

With this information, we can see why China Wire & Cable is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.

What We Can Learn From China Wire & Cable's P/E?

The latest share price surge wasn't enough to lift China Wire & Cable's P/E close to the market median. 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.

We've established that China Wire & Cable maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for China Wire & Cable with six simple checks will allow you to discover any risks that could be an issue.

If you're unsure about the strength of China Wire & Cable'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.