Alchip Technologies, Limited's (TWSE:3661) 26% Jump Shows Its Popularity With Investors

Alchip Technologies, Limited (TWSE:3661) shareholders would be excited to see that the share price has had a great month, posting a 26% gain and recovering from prior weakness. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 24% over that time.

Following the firm bounce in price, Alchip Technologies may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 40.1x, since almost half of all companies in Taiwan have P/E ratios under 21x and even P/E's lower than 14x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's superior to most other companies of late, Alchip Technologies has been doing relatively well. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Alchip Technologies

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Is There Enough Growth For Alchip Technologies?

In order to justify its P/E ratio, Alchip Technologies would need to produce outstanding growth well in excess of the market.

If we review the last year of earnings growth, the company posted a terrific increase of 100%. The strong recent performance means it was also able to grow EPS by 218% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the twelve analysts covering the company suggest earnings should grow by 51% per annum over the next three years. With the market only predicted to deliver 16% per year, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Alchip Technologies' P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Alchip Technologies' P/E

Alchip Technologies' P/E is flying high just like its stock has during the last month. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

As we suspected, our examination of Alchip Technologies' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. 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 3 warning signs with Alchip Technologies (at least 2 which make us uncomfortable), and understanding these should be part of your investment process.

Of course, you might also be able to find a better stock than Alchip Technologies. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.