A Piece Of The Puzzle Missing From San Fang Chemical Industry Co., Ltd.'s (TWSE:1307) 25% Share Price Climb

Despite an already strong run, San Fang Chemical Industry Co., Ltd. (TWSE:1307) shares have been powering on, with a gain of 25% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 94% in the last year.

Although its price has surged higher, San Fang Chemical Industry may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 16.4x, since almost half of all companies in Taiwan have P/E ratios greater than 22x and even P/E's higher than 40x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

Recent times have been advantageous for San Fang Chemical Industry as its earnings have been rising faster than most other companies. 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.

Check out our latest analysis for San Fang Chemical Industry

If you'd like to see what analysts are forecasting going forward, you should check out our free report on San Fang Chemical Industry.

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

The only time you'd be truly comfortable seeing a P/E as low as San Fang Chemical Industry's is when the company's growth is on track to lag the market.

Retrospectively, the last year delivered an exceptional 106% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 149% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the lone analyst covering the company suggest earnings should grow by 29% over the next year. Meanwhile, the rest of the market is forecast to only expand by 24%, which is noticeably less attractive.

In light of this, it's peculiar that San Fang Chemical Industry's P/E sits below the majority of other companies. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

The Bottom Line On San Fang Chemical Industry's P/E

Despite San Fang Chemical Industry's shares building up a head of steam, its P/E still lags most other companies. 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.

We've established that San Fang Chemical Industry currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. There could be some major unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.

It is also worth noting that we have found 2 warning signs for San Fang Chemical Industry that you need to take into consideration.

You might be able to find a better investment than San Fang Chemical Industry. 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.