Generalplus Technology Inc.'s (TWSE:4952) 36% Share Price Surge Not Quite Adding Up

Generalplus Technology Inc. (TWSE:4952) shareholders would be excited to see that the share price has had a great month, posting a 36% 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.

Following the firm bounce in price, Generalplus Technology may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 36.5x, since almost half of all companies in Taiwan have P/E ratios under 22x and even P/E's lower than 15x 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.

As an illustration, earnings have deteriorated at Generalplus Technology over the last year, which is not ideal at all. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.

See our latest analysis for Generalplus Technology

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Generalplus Technology will help you shine a light on its historical performance.

What Are Growth Metrics Telling Us About The High P/E?

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

Retrospectively, the last year delivered a frustrating 49% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 45% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Comparing that to the market, which is predicted to deliver 26% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

With this information, we find it concerning that Generalplus Technology is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

The Final Word

Generalplus Technology's 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.

Our examination of Generalplus Technology revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Generalplus Technology (1 is concerning) you should be aware of.

You might be able to find a better investment than Generalplus Technology. 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.