More Unpleasant Surprises Could Be In Store For Walton Advanced Engineering, Inc.'s (TWSE:8110) Shares After Tumbling 26%

Walton Advanced Engineering, Inc. (TWSE:8110) shareholders won't be pleased to see that the share price has had a very rough month, dropping 26% and undoing the prior period's positive performance. Longer-term, the stock has been solid despite a difficult 30 days, gaining 17% in the last year.

Although its price has dipped substantially, given close to half the companies in Taiwan have price-to-earnings ratios (or "P/E's") below 22x, you may still consider Walton Advanced Engineering as a stock to avoid entirely with its 74.5x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

As an illustration, earnings have deteriorated at Walton Advanced Engineering over the last year, which is not ideal at all. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Walton Advanced Engineering

Although there are no analyst estimates available for Walton Advanced Engineering, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Does Growth Match The High P/E?

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

Retrospectively, the last year delivered a frustrating 54% 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 74% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Comparing that to the market, which is predicted to deliver 23% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

In light of this, it's alarming that Walton Advanced Engineering's P/E sits above the majority of other companies. 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.

What We Can Learn From Walton Advanced Engineering's P/E?

Even after such a strong price drop, Walton Advanced Engineering's P/E still exceeds the rest of the market significantly. 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.

Our examination of Walton Advanced Engineering 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.

And what about other risks? Every company has them, and we've spotted 4 warning signs for Walton Advanced Engineering (of which 1 is a bit unpleasant!) you should know about.

Of course, you might also be able to find a better stock than Walton Advanced Engineering. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com