Optimistic Investors Push Kaimei Electronic Corp. (TWSE:2375) Shares Up 30% But Growth Is Lacking

Kaimei Electronic Corp. (TWSE:2375) shareholders have had their patience rewarded with a 30% share price jump in the last month. Taking a wider view, although not as strong as the last month, the full year gain of 12% is also fairly reasonable.

Since its price has surged higher, Kaimei Electronic's price-to-earnings (or "P/E") ratio of 29x 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 21x and even P/E's below 14x 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.

As an illustration, earnings have deteriorated at Kaimei Electronic over the last year, which is not ideal at all. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.

Check out our latest analysis for Kaimei Electronic

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Kaimei Electronic will help you shine a light on its historical performance.

Is There Enough Growth For Kaimei Electronic?

The only time you'd be truly comfortable seeing a P/E as high as Kaimei Electronic's is when the company's growth is on track to outshine the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 7.8%. This means it has also seen a slide in earnings over the longer-term as EPS is down 73% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Comparing that to the market, which is predicted to deliver 24% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

With this information, we find it concerning that Kaimei Electronic is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. 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

Kaimei Electronic shares have received a push in the right direction, but its P/E is elevated too. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Kaimei Electronic 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. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Having said that, be aware Kaimei Electronic is showing 1 warning sign in our investment analysis, you should know about.

Of course, you might also be able to find a better stock than Kaimei Electronic. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.