Optimistic Investors Push Khgears International Limited (TWSE:4571) Shares Up 33% But Growth Is Lacking

Khgears International Limited (TWSE:4571) shareholders have had their patience rewarded with a 33% share price jump in the last month. The annual gain comes to 142% following the latest surge, making investors sit up and take notice.

In spite of the firm bounce in price, you could still be forgiven for feeling indifferent about Khgears International's P/E ratio of 23.8x, since the median price-to-earnings (or "P/E") ratio in Taiwan is also close to 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.

With earnings growth that's exceedingly strong of late, Khgears International has been doing very well. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If that doesn't eventuate, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

View our latest analysis for Khgears International

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

How Is Khgears International's Growth Trending?

The only time you'd be comfortable seeing a P/E like Khgears International's 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 32%. However, this wasn't enough as the latest three year period has seen a very unpleasant 7.0% drop in EPS in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

In contrast to the company, the rest of the market is expected to grow by 25% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

With this information, we find it concerning that Khgears International is trading at a fairly similar P/E to the market. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a 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.

The Final Word

Its shares have lifted substantially and now Khgears International's P/E is also back up to the market median. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of Khgears International revealed its shrinking earnings over the medium-term aren't impacting its P/E as much as we would have predicted, given the market is set to grow. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.

You need to take note of risks, for example - Khgears International has 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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

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.