Foxconn Technology Co., Ltd.'s (TWSE:2354) Price Is Out Of Tune With Earnings

When close to half the companies in Taiwan have price-to-earnings ratios (or "P/E's") below 21x, you may consider Foxconn Technology Co., Ltd. (TWSE:2354) as a stock to potentially avoid with its 30x 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 as high as it is.

While the market has experienced earnings growth lately, Foxconn Technology's earnings have gone into reverse gear, which is not great. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

Check out our latest analysis for Foxconn Technology

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Foxconn Technology.

Does Growth Match The High P/E?

Foxconn Technology's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 15%. This means it has also seen a slide in earnings over the longer-term as EPS is down 27% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 6.7% each year as estimated by the sole analyst watching the company. With the market predicted to deliver 16% growth per year, the company is positioned for a weaker earnings result.

With this information, we find it concerning that Foxconn Technology is trading at a P/E higher than the market. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

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.

Our examination of Foxconn Technology's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

It is also worth noting that we have found 2 warning signs for Foxconn Technology (1 shouldn't be ignored!) that you need to take into consideration.

You might be able to find a better investment than Foxconn Technology. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.