Yuanta Financial Holding Co., Ltd.'s (TWSE:2885) Price Is Right But Growth Is Lacking

Yuanta Financial Holding Co., Ltd.'s (TWSE:2885) price-to-earnings (or "P/E") ratio of 15x might make it look like a buy right now compared to the market in Taiwan, where around half of the companies have P/E ratios above 21x and even P/E's above 38x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

With earnings growth that's superior to most other companies of late, Yuanta Financial Holding has been doing relatively well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

View our latest analysis for Yuanta Financial Holding

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Yuanta Financial Holding.

Does Growth Match The Low P/E?

There's an inherent assumption that a company should underperform the market for P/E ratios like Yuanta Financial Holding's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 19% last year. However, this wasn't enough as the latest three year period has seen a very unpleasant 8.3% drop in EPS in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the four analysts covering the company suggest earnings should grow by 20% over the next year. That's shaping up to be materially lower than the 25% growth forecast for the broader market.

With this information, we can see why Yuanta Financial Holding is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

What We Can Learn From Yuanta Financial Holding's P/E?

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.

As we suspected, our examination of Yuanta Financial Holding's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Yuanta Financial Holding (at least 1 which is a bit unpleasant), and understanding them should be part of your investment process.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.