San Fang Chemical Industry Co., Ltd. (TWSE:1307) Soars 30% But It's A Story Of Risk Vs Reward

San Fang Chemical Industry Co., Ltd. (TWSE:1307) shares have had a really impressive month, gaining 30% after a shaky period beforehand. Looking back a bit further, it's encouraging to see the stock is up 88% in the last year.

In spite of the firm bounce in price, given about half the companies in Taiwan have price-to-earnings ratios (or "P/E's") above 22x, you may still consider San Fang Chemical Industry as an attractive investment with its 16.5x 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 limited.

San Fang Chemical Industry certainly has been doing a good job lately as it's been growing earnings more than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

See 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.

How Is San Fang Chemical Industry's Growth Trending?

There's an inherent assumption that a company should underperform the market for P/E ratios like San Fang Chemical Industry's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 76%. Pleasingly, EPS has also lifted 532% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the one analyst covering the company suggest earnings should grow by 38% over the next year. That's shaping up to be materially higher than the 24% growth forecast for the broader market.

With this information, we find it odd that San Fang Chemical Industry is trading at a P/E lower than the market. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

The Key Takeaway

San Fang Chemical Industry's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

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. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. It appears many are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for San Fang Chemical Industry that you should be aware of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.