Huaku Development Co., Ltd. (TWSE:2548) Held Back By Insufficient Growth Even After Shares Climb 25%

The Huaku Development Co., Ltd. (TWSE:2548) share price has done very well over the last month, posting an excellent gain of 25%. The last 30 days bring the annual gain to a very sharp 29%.

In spite of the firm bounce in price, Huaku Development may still be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 9.3x, since almost half of all companies in Taiwan have P/E ratios greater than 23x and even P/E's higher than 39x 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 so limited.

Earnings have risen firmly for Huaku Development recently, which is pleasing to see. It might be that many expect the respectable earnings performance to degrade substantially, which has repressed the P/E. 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.

View our latest analysis for Huaku Development

Although there are no analyst estimates available for Huaku Development, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Does Growth Match The Low P/E?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Huaku Development's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 21% gain to the company's bottom line. As a result, it also grew EPS by 29% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

This is in contrast to the rest of the market, which is expected to grow by 24% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's understandable that Huaku Development's P/E sits below the majority of other companies. 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 Bottom Line On Huaku Development's P/E

Even after such a strong price move, Huaku Development's P/E still trails the rest of the market significantly. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of Huaku Development revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. 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.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Huaku Development you should know about.

You might be able to find a better investment than Huaku Development. 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).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.