The Market Lifts Fortune Oriental Company Limited (TPE:2491) Shares 63% But It Can Do More

Despite an already strong run, Fortune Oriental Company Limited (TPE:2491) shares have been powering on, with a gain of 63% in the last thirty days. The last month tops off a massive increase of 234% in the last year.

In spite of the firm bounce in price, Fortune Oriental's price-to-earnings (or "P/E") ratio of 15.6x 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 20x and even P/E's above 36x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

For example, consider that Fortune Oriental's financial performance has been poor lately as it's earnings have been in decline. It might be that many expect the disappointing earnings performance to continue or accelerate, which has repressed the P/E. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

Check out our latest analysis for Fortune Oriental

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Fortune Oriental's earnings, revenue and cash flow.

How Is Fortune Oriental's Growth Trending?

In order to justify its P/E ratio, Fortune Oriental would need to produce sluggish growth that's trailing the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 73%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 192% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

This is in contrast to the rest of the market, which is expected to grow by 25% over the next year, materially lower than the company's recent medium-term annualised growth rates.

With this information, we find it odd that Fortune Oriental is trading at a P/E lower than the market. It looks like most investors are not convinced the company can maintain its recent growth rates.

The Final Word

Despite Fortune Oriental's shares building up a head of steam, its P/E still lags most other companies. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Fortune Oriental currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this positive performance. It appears many are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 4 warning signs with Fortune Oriental (at least 1 which is a bit unpleasant), and understanding them should be part of your investment process.

You might be able to find a better investment than Fortune Oriental. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).

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This article by Simply Wall St is general in nature. 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.
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