Taiwan Sanyo Electric Co.,Ltd.'s (TWSE:1614) 29% Price Boost Is Out Of Tune With Earnings

Taiwan Sanyo Electric Co.,Ltd. (TWSE:1614) shareholders have had their patience rewarded with a 29% share price jump in the last month. Looking back a bit further, it's encouraging to see the stock is up 39% in the last year.

Since its price has surged higher, Taiwan Sanyo ElectricLtd's price-to-earnings (or "P/E") ratio of 40.7x 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 23x and even P/E's below 16x are quite common. 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.

Earnings have risen firmly for Taiwan Sanyo ElectricLtd recently, which is pleasing to see. It might be that many expect the respectable 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 may be a little nervous about the viability of the share price.

Check out our latest analysis for Taiwan Sanyo ElectricLtd

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 Sanyo ElectricLtd's earnings, revenue and cash flow.

Is There Enough Growth For Taiwan Sanyo ElectricLtd?

The only time you'd be truly comfortable seeing a P/E as steep as Taiwan Sanyo ElectricLtd'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 worthy increase of 10%. Ultimately though, it couldn't turn around the poor performance of the prior period, with EPS shrinking 8.7% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Comparing that to the market, which is predicted to deliver 27% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

In light of this, it's alarming that Taiwan Sanyo ElectricLtd's P/E sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate 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 Bottom Line On Taiwan Sanyo ElectricLtd's P/E

Taiwan Sanyo ElectricLtd's P/E is flying high just like its stock has during the last month. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

Our examination of Taiwan Sanyo ElectricLtd revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near 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 high P/E lower. 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.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Taiwan Sanyo ElectricLtd you should know about.

You might be able to find a better investment than Taiwan Sanyo ElectricLtd. 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.