Yuan Jen Enterprises Co.,Ltd.'s (TWSE:1725) 30% Share Price Plunge Could Signal Some Risk

Yuan Jen Enterprises Co.,Ltd. (TWSE:1725) shares have had a horrible month, losing 30% after a relatively good period beforehand. Looking at the bigger picture, even after this poor month the stock is up 74% in the last year.

In spite of the heavy fall in price, Yuan Jen EnterprisesLtd may still be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 29.6x, since almost half of all companies in Taiwan have P/E ratios under 22x and even P/E's lower than 15x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Earnings have risen at a steady rate over the last year for Yuan Jen EnterprisesLtd, which is generally not a bad outcome. One possibility is that the P/E is high because investors think this good earnings growth will be enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Yuan Jen EnterprisesLtd

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

Is There Enough Growth For Yuan Jen EnterprisesLtd?

The only time you'd be truly comfortable seeing a P/E as high as Yuan Jen EnterprisesLtd's is when the company's growth is on track to outshine the market.

Retrospectively, the last year delivered a decent 2.6% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen an unpleasant 22% overall drop in EPS. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

In contrast to the company, the rest of the market is expected to grow by 23% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

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

What We Can Learn From Yuan Jen EnterprisesLtd's P/E?

Despite the recent share price weakness, Yuan Jen EnterprisesLtd's P/E remains higher than most other companies. 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 Yuan Jen EnterprisesLtd currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

It is also worth noting that we have found 2 warning signs for Yuan Jen EnterprisesLtd (1 shouldn't be ignored!) that you need to take into consideration.

You might be able to find a better investment than Yuan Jen EnterprisesLtd. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.

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