Formosa Oilseed Processing Co., Ltd. (TWSE:1225) Stock Rockets 26% As Investors Are Less Pessimistic Than Expected

Despite an already strong run, Formosa Oilseed Processing Co., Ltd. (TWSE:1225) shares have been powering on, with a gain of 26% in the last thirty days. The last month tops off a massive increase of 203% in the last year.

After such a large jump in price, given close to half the companies in Taiwan have price-to-earnings ratios (or "P/E's") below 21x, you may consider Formosa Oilseed Processing as a stock to avoid entirely with its 79.7x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's exceedingly strong of late, Formosa Oilseed Processing has been doing very well. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for Formosa Oilseed Processing

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

How Is Formosa Oilseed Processing's Growth Trending?

In order to justify its P/E ratio, Formosa Oilseed Processing would need to produce outstanding growth well in excess of the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 285% last year. Still, incredibly EPS has fallen 12% in total from three years ago, which is quite disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 25% shows it's an unpleasant look.

With this information, we find it concerning that Formosa Oilseed Processing is trading at a P/E higher than 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. 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.

What We Can Learn From Formosa Oilseed Processing's P/E?

The strong share price surge has got Formosa Oilseed Processing's P/E rushing to great heights as well. 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 Formosa Oilseed Processing 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. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Before you take the next step, you should know about the 2 warning signs for Formosa Oilseed Processing (1 is significant!) that we have uncovered.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.