There's Reason For Concern Over Compal Broadband Networks, Inc.'s (TPE:6674) Massive 35% Price Jump

Compal Broadband Networks, Inc. (TPE:6674) shareholders have had their patience rewarded with a 35% share price jump in the last month. The annual gain comes to 128% following the latest surge, making investors sit up and take notice.

After such a large jump in price, Compal Broadband Networks may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 63.4x, since almost half of all companies in Taiwan have P/E ratios under 20x and even P/E's lower than 14x 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.

Compal Broadband Networks certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Compal Broadband Networks

Although there are no analyst estimates available for Compal Broadband Networks, 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?

In order to justify its P/E ratio, Compal Broadband Networks would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered an exceptional 348% gain to the company's bottom line. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 77% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 25% shows it's an unpleasant look.

With this information, we find it concerning that Compal Broadband Networks is trading at a P/E higher than the market. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. 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

Shares in Compal Broadband Networks have built up some good momentum lately, which has really inflated its P/E. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Compal Broadband Networks currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. 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. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Plus, you should also learn about these 4 warning signs we've spotted with Compal Broadband Networks (including 1 which is a bit concerning).

Of course, you might also be able to find a better stock than Compal Broadband Networks. So you may wish to see this free collection of other companies that sit on P/E's below 20x and have grown earnings strongly.

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