Improved Earnings Required Before Cathay Real Estate Development Co.,Ltd. (TWSE:2501) Stock's 30% Jump Looks Justified

The Cathay Real Estate Development Co.,Ltd. (TWSE:2501) share price has done very well over the last month, posting an excellent gain of 30%. The last 30 days bring the annual gain to a very sharp 38%.

In spite of the firm bounce in price, Cathay Real Estate DevelopmentLtd's price-to-earnings (or "P/E") ratio of 12.7x might still make it look like a buy right now compared to the market in Taiwan, where around half of the companies have P/E ratios above 24x and even P/E's above 40x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

With earnings growth that's exceedingly strong of late, Cathay Real Estate DevelopmentLtd has been doing very well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

View our latest analysis for Cathay Real Estate DevelopmentLtd

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

Does Growth Match The Low P/E?

Cathay Real Estate DevelopmentLtd's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

Retrospectively, the last year delivered an exceptional 79% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 46% in total over the last three years. 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 26% shows it's noticeably less attractive on an annualised basis.

With this information, we can see why Cathay Real Estate DevelopmentLtd is trading at a P/E lower than the market. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

The Key Takeaway

Cathay Real Estate DevelopmentLtd's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Cathay Real Estate DevelopmentLtd maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Cathay Real Estate DevelopmentLtd (2 shouldn't be ignored!) that you need to be mindful 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.