Acer Incorporated's (TWSE:2353) P/E Is Still On The Mark Following 29% Share Price Bounce

Acer Incorporated (TWSE:2353) shareholders have had their patience rewarded with a 29% share price jump in the last month. Looking back a bit further, it's encouraging to see the stock is up 86% in the last year.

Since its price has surged higher, Acer's price-to-earnings (or "P/E") ratio of 30.8x 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 22x and even P/E's below 15x 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 as high as it is.

Acer certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Acer

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

In order to justify its P/E ratio, Acer would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered an exceptional 71% gain to the company's bottom line. Still, incredibly EPS has fallen 32% in total from three years ago, which is quite disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 18% each year during the coming three years according to the six analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 11% per annum, which is noticeably less attractive.

With this information, we can see why Acer is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

Acer shares have received a push in the right direction, but its P/E is elevated too. 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.

As we suspected, our examination of Acer's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these 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 1 warning sign for Acer you should know about.

If these risks are making you reconsider your opinion on Acer, 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. 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.