Why Investors Shouldn't Be Surprised By Shin Zu Shing Co., Ltd.'s (TWSE:3376) 28% Share Price Surge

Shin Zu Shing Co., Ltd. (TWSE:3376) shares have continued their recent momentum with a 28% gain in the last month alone. The last month tops off a massive increase of 149% in the last year.

After such a large jump in price, Shin Zu Shing's price-to-earnings (or "P/E") ratio of 53.6x might make it look like a strong sell right now compared to the market in Taiwan, where around half of the companies have P/E ratios below 22x and even P/E's below 15x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Recent times haven't been advantageous for Shin Zu Shing as its earnings have been falling quicker than most other companies. It might be that many expect the dismal earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be very nervous about the viability of the share price.

Check out our latest analysis for Shin Zu Shing

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Shin Zu Shing.

What Are Growth Metrics Telling Us About The High P/E?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Shin Zu Shing's to be considered reasonable.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 56%. The last three years don't look nice either as the company has shrunk EPS by 51% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next year should generate growth of 49% as estimated by the three analysts watching the company. With the market only predicted to deliver 22%, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Shin Zu Shing's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Key Takeaway

The strong share price surge has got Shin Zu Shing's P/E rushing to great heights as well. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Shin Zu Shing maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

You need to take note of risks, for example - Shin Zu Shing has 3 warning signs (and 1 which is concerning) we think you should know about.

You might be able to find a better investment than Shin Zu Shing. 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.