Formosa Oilseed Processing Co., Ltd.'s (TWSE:1225) Popularity With Investors Under Threat As Stock Sinks 29%

Formosa Oilseed Processing Co., Ltd. (TWSE:1225) shares have had a horrible month, losing 29% after a relatively good period beforehand. The good news is that in the last year, the stock has shone bright like a diamond, gaining 107%.

In spite of the heavy fall in price, Formosa Oilseed Processing's price-to-earnings (or "P/E") ratio of 55.2x might still 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 21x and even P/E's below 15x 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.

Recent times have been quite advantageous for Formosa Oilseed Processing as its earnings have been rising very briskly. 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.

View 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.

What Are Growth Metrics Telling Us About The High P/E?

Formosa Oilseed Processing's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 285% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 12% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

In contrast to the company, the rest of the market is expected to grow by 24% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

In light of this, it's alarming that Formosa Oilseed Processing'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. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

The Key Takeaway

Formosa Oilseed Processing's shares may have retreated, but its P/E is still flying high. 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. 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.

Before you settle on your opinion, we've discovered 2 warning signs for Formosa Oilseed Processing that you should be aware of.

You might be able to find a better investment than Formosa Oilseed Processing. 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.