Investors Still Waiting For A Pull Back In Formosa Plastics Corporation (TWSE:1301)

When close to half the companies in Taiwan have price-to-earnings ratios (or "P/E's") below 20x, you may consider Formosa Plastics Corporation (TWSE:1301) as a stock to avoid entirely with its 55x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Formosa Plastics certainly has been doing a good job lately as it's been growing earnings more than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Formosa Plastics

Keen to find out how analysts think Formosa Plastics' future stacks up against the industry? In that case, our free report is a great place to start.

How Is Formosa Plastics' Growth Trending?

The only time you'd be truly comfortable seeing a P/E as steep as Formosa Plastics' 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 177%. Still, incredibly EPS has fallen 90% in total from three years ago, which is quite disappointing. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Shifting to the future, estimates from the nine analysts covering the company suggest earnings should grow by 59% each year over the next three years. With the market only predicted to deliver 13% each year, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Formosa Plastics' P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

As we suspected, our examination of Formosa Plastics' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

You should always think about risks. Case in point, we've spotted 1 warning sign for Formosa Plastics you should be aware of.

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.