AMPAK Technology Inc.'s (GTSM:6546) price-to-earnings (or "P/E") ratio of 27.6x might make it look like a sell right now compared to the market in Taiwan, where around half of the companies have P/E ratios below 18x and even P/E's below 13x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's lofty.
With earnings growth that's exceedingly strong of late, AMPAK Technology has been doing very well. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
View our latest analysis for AMPAK Technology
Is There Enough Growth For AMPAK Technology?
There's an inherent assumption that a company should outperform the market for P/E ratios like AMPAK Technology's to be considered reasonable.
If we review the last year of earnings growth, the company posted a terrific increase of 259%. The strong recent performance means it was also able to grow EPS by 110% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.
Comparing that to the market, which is only predicted to deliver 23% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised earnings results.
With this information, we can see why AMPAK Technology is trading at such a high P/E compared to the market. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.
The Final Word
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.
As we suspected, our examination of AMPAK Technology revealed its three-year earnings trends are contributing to its high P/E, given they look better than current market expectations. Right now shareholders are comfortable with the P/E as they are quite confident earnings aren't under threat. Unless the recent medium-term conditions change, they will continue to provide strong support to the share price.
And what about other risks? Every company has them, and we've spotted 2 warning signs for AMPAK Technology (of which 1 is concerning!) you should know about.
If these risks are making you reconsider your opinion on AMPAK Technology, explore our interactive list of high quality stocks to get an idea of what else is out there.
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This article by Simply Wall St is general in nature. 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.
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About TPEX:6546
AMPAK Technology
Engages in the research and development, design, production, and marketing of wireless module in Taiwan.
Flawless balance sheet with high growth potential.
