Further Upside For L&K Engineering Co., Ltd. (TWSE:6139) Shares Could Introduce Price Risks After 27% Bounce

L&K Engineering Co., Ltd. (TWSE:6139) shareholders are no doubt pleased to see that the share price has bounced 27% in the last month, although it is still struggling to make up recently lost ground. This latest share price bounce rounds out a remarkable 318% gain over the last twelve months.

Although its price has surged higher, L&K Engineering may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 17.7x, since almost half of all companies in Taiwan have P/E ratios greater than 24x and even P/E's higher than 42x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

With earnings growth that's exceedingly strong of late, L&K Engineering has been doing very well. 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 L&K Engineering

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on L&K Engineering's earnings, revenue and cash flow.

Is There Any Growth For L&K Engineering?

In order to justify its P/E ratio, L&K Engineering would need to produce sluggish growth that's trailing the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 226% last year. Pleasingly, EPS has also lifted 713% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

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

In light of this, it's peculiar that L&K Engineering's P/E sits below the majority of other companies. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

The Key Takeaway

Despite L&K Engineering's shares building up a head of steam, its P/E still lags most other companies. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that L&K Engineering currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this positive performance. At least price risks look to be very low if recent medium-term earnings trends continue, but investors seem to think future earnings could see a lot of volatility.

There are also other vital risk factors to consider and we've discovered 3 warning signs for L&K Engineering (1 doesn't sit too well with us!) that you should be aware of before investing here.

If these risks are making you reconsider your opinion on L&K Engineering, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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