Unpleasant Surprises Could Be In Store For Taiwan Secom Co., Ltd.'s (TWSE:9917) Shares

It's not a stretch to say that Taiwan Secom Co., Ltd.'s (TWSE:9917) price-to-earnings (or "P/E") ratio of 22.4x right now seems quite "middle-of-the-road" compared to the market in Taiwan, where the median P/E ratio is around 21x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

Earnings have risen at a steady rate over the last year for Taiwan Secom, which is generally not a bad outcome. It might be that many expect the respectable earnings performance to only match most other companies over the coming period, which has kept the P/E from rising. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

See our latest analysis for Taiwan Secom

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 Taiwan Secom's earnings, revenue and cash flow.

How Is Taiwan Secom's Growth Trending?

The only time you'd be comfortable seeing a P/E like Taiwan Secom's is when the company's growth is tracking the market closely.

Retrospectively, the last year delivered a decent 6.8% gain to the company's bottom line. The latest three year period has also seen a 8.3% overall rise in EPS, aided somewhat by its short-term performance. Therefore, it's fair to say the earnings growth recently has been respectable 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 curious that Taiwan Secom's P/E sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. They may be setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Final Word

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.

Our examination of Taiwan Secom revealed its three-year earnings trends aren't impacting its P/E as much as we would have predicted, given they look worse than current market expectations. When we see weak earnings with slower than market growth, 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.

Having said that, be aware Taiwan Secom is showing 1 warning sign in our investment analysis, you should know about.

If you're unsure about the strength of Taiwan Secom's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.