Risks Still Elevated At These Prices As Lian Hwa Foods Corporation (TWSE:1231) Shares Dive 26%

The Lian Hwa Foods Corporation (TWSE:1231) share price has softened a substantial 26% over the previous 30 days, handing back much of the gains the stock has made lately. Still, a bad month hasn't completely ruined the past year with the stock gaining 53%, which is great even in a bull market.

In spite of the heavy fall in price, given close to half the companies in Taiwan have price-to-earnings ratios (or "P/E's") below 20x, you may still consider Lian Hwa Foods as a stock to avoid entirely with its 31.3x P/E ratio. 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.

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Earnings have risen firmly for Lian Hwa Foods recently, which is pleasing to see. One possibility is that the P/E is high because investors think this respectable earnings growth will be enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Lian Hwa Foods

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

Is There Enough Growth For Lian Hwa Foods?

The only time you'd be truly comfortable seeing a P/E as steep as Lian Hwa Foods' 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 terrific increase of 18%. The latest three year period has also seen an excellent 41% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 19% shows it's noticeably less attractive on an annualised basis.

In light of this, it's alarming that Lian Hwa Foods' P/E sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates 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 Lian Hwa Foods' P/E

A significant share price dive has done very little to deflate Lian Hwa Foods' very lofty P/E. 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 Lian Hwa Foods revealed its three-year earnings trends aren't impacting its high P/E anywhere near 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 high P/E lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Lian Hwa Foods (1 makes us a bit uncomfortable!) that you need to be mindful of.

If these risks are making you reconsider your opinion on Lian Hwa Foods, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.