Phihong Technology Co., Ltd. (TWSE:2457) Shares May Have Slumped 27% But Getting In Cheap Is Still Unlikely

The Phihong Technology Co., Ltd. (TWSE:2457) share price has fared very poorly over the last month, falling by a substantial 27%. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 42% in that time.

Although its price has dipped substantially, given close to half the companies in Taiwan have price-to-earnings ratios (or "P/E's") below 20x, you may still consider Phihong Technology as a stock to avoid entirely with its 56.2x 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 so lofty.

Phihong Technology certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for Phihong Technology

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

Is There Enough Growth For Phihong Technology?

The only time you'd be truly comfortable seeing a P/E as steep as Phihong Technology's is when the company's growth is on track to outshine the market decidedly.

If we review the last year of earnings growth, the company posted a terrific increase of 38%. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

This is in contrast to the rest of the market, which is expected to grow by 24% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's alarming that Phihong Technology's P/E sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Final Word

Phihong Technology's shares may have retreated, but its P/E is still flying high. 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.

We've established that Phihong Technology currently trades on a much higher than expected P/E since its recent three-year growth is lower than the wider market forecast. Right now we are increasingly uncomfortable with the high P/E as this earnings performance isn't likely to support such positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You always need to take note of risks, for example - Phihong Technology has 1 warning sign we think you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com