It's not a stretch to say that Ennoconn Corporation's (TPE:6414) price-to-earnings (or "P/E") ratio of 20.6x right now seems quite "middle-of-the-road" compared to the market in Taiwan, where the median P/E ratio is around 19x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.
With its earnings growth in positive territory compared to the declining earnings of most other companies, Ennoconn has been doing quite well of late. It might be that many expect the strong earnings performance to deteriorate like the rest, which has kept the P/E from rising. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.
View our latest analysis for Ennoconn
Does Ennoconn Have A Relatively High Or Low P/E For Its Industry?
An inspection of the typical P/E's throughout Ennoconn's industry may help to explain its fairly average P/E ratio. You'll notice in the figure below that P/E ratios in the Tech industry are also similar to the market. So this certainly goes a fair way towards explaining the company's ratio right now. Ordinarily, the majority of companies' P/E's would be constrained by the general conditions within the Tech industry. Whilst this can be a heavy component, industry factors are normally secondary to company financials and earnings.
Does Growth Match The P/E?
In order to justify its P/E ratio, Ennoconn would need to produce growth that's similar to the market.
Retrospectively, the last year delivered a decent 4.1% gain to the company's bottom line. The latest three year period has also seen a 5.4% overall rise in EPS, aided somewhat by its short-term performance. Therefore, it's fair to say the earnings growth recently has been respectable for the company.
Looking ahead now, EPS is anticipated to climb by 7.4% per year during the coming three years according to the eight analysts following the company. That's shaping up to be materially lower than the 9.9% per annum growth forecast for the broader market.
In light of this, it's curious that Ennoconn's P/E sits in line with the majority of other companies. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.
The Final Word
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.
We've established that Ennoconn currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.
It is also worth noting that we have found 2 warning signs for Ennoconn (1 is a bit unpleasant!) that you need to take into consideration.
It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20x).
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