Benign Growth For Taiwan Hon Chuan Enterprise Co., Ltd. (TWSE:9939) Underpins Its Share Price

When close to half the companies in Taiwan have price-to-earnings ratios (or "P/E's") above 22x, you may consider Taiwan Hon Chuan Enterprise Co., Ltd. (TWSE:9939) as an attractive investment with its 17.3x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Recent times have been advantageous for Taiwan Hon Chuan Enterprise 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.

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Does Growth Match The Low P/E?

In order to justify its P/E ratio, Taiwan Hon Chuan Enterprise would need to produce sluggish growth that's trailing the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 30% last year. Pleasingly, EPS has also lifted 35% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 10% during the coming year according to the three analysts following the company. That's shaping up to be materially lower than the 25% growth forecast for the broader market.

With this information, we can see why Taiwan Hon Chuan Enterprise is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Key Takeaway

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.

As we suspected, our examination of Taiwan Hon Chuan Enterprise's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Having said that, be aware Taiwan Hon Chuan Enterprise is showing 3 warning signs in our investment analysis, you should know about.

If you're unsure about the strength of Taiwan Hon Chuan Enterprise's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.