Shareholders Should Be Pleased With Alchip Technologies, Limited's (TWSE:3661) Price

With a price-to-earnings (or "P/E") ratio of 35.8x Alchip Technologies, Limited (TWSE:3661) may be sending very bearish signals at the moment, given that almost half of all companies in Taiwan have P/E ratios under 21x and even P/E's lower than 15x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

With earnings growth that's superior to most other companies of late, Alchip Technologies has been doing relatively well. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.

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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.

Taking a look back first, we see that the company grew earnings per share by an impressive 100% last year. The strong recent performance means it was also able to grow EPS by 218% 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.

Looking ahead now, EPS is anticipated to climb by 54% per year during the coming three years according to the twelve analysts following the company. That's shaping up to be materially higher than the 17% per annum growth forecast for the broader market.

In light of this, it's understandable that Alchip Technologies' 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.

The Key Takeaway

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Alchip Technologies maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 3 warning signs for Alchip Technologies you should be aware of, and 1 of them shouldn't be ignored.

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.