Visual Photonics Epitaxy Co., Ltd. (TWSE:2455) Stocks Shoot Up 28% But Its P/E Still Looks Reasonable

Visual Photonics Epitaxy Co., Ltd. (TWSE:2455) shareholders would be excited to see that the share price has had a great month, posting a 28% gain and recovering from prior weakness. Taking a wider view, although not as strong as the last month, the full year gain of 20% is also fairly reasonable.

Since its price has surged higher, Visual Photonics Epitaxy's price-to-earnings (or "P/E") ratio of 43.7x might make it look like a strong sell right now compared to the market in Taiwan, where around half of the companies have P/E ratios below 21x and even P/E's below 15x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Recent times have been advantageous for Visual Photonics Epitaxy as its earnings have been rising faster than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for Visual Photonics Epitaxy

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Visual Photonics Epitaxy.

How Is Visual Photonics Epitaxy's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as steep as Visual Photonics Epitaxy's is when the company's growth is on track to outshine the market decidedly.

If we review the last year of earnings growth, the company posted a terrific increase of 179%. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Turning to the outlook, the next three years should generate growth of 23% per annum as estimated by the seven analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 17% each year, which is noticeably less attractive.

In light of this, it's understandable that Visual Photonics Epitaxy's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What We Can Learn From Visual Photonics Epitaxy's P/E?

Shares in Visual Photonics Epitaxy have built up some good momentum lately, which has really inflated its P/E. 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.

As we suspected, our examination of Visual Photonics Epitaxy's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Visual Photonics Epitaxy, and understanding should be part of your investment process.

You might be able to find a better investment than Visual Photonics Epitaxy. 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).

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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.