Why We're Not Concerned About Giga-Byte Technology Co., Ltd.'s (TWSE:2376) Share Price

When close to half the companies in Taiwan have price-to-earnings ratios (or "P/E's") below 22x, you may consider Giga-Byte Technology Co., Ltd. (TWSE:2376) as a stock to avoid entirely with its 42.8x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

With earnings that are retreating more than the market's of late, Giga-Byte Technology has been very sluggish. It might be that many expect the dismal earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be very nervous about the viability of the share price.

View our latest analysis for Giga-Byte Technology

Keen to find out how analysts think Giga-Byte Technology's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Giga-Byte Technology's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as steep as Giga-Byte Technology's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered a frustrating 47% decrease to the company's bottom line. Regardless, EPS has managed to lift by a handy 29% in aggregate from three years ago, thanks to the earlier period of growth. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been mostly respectable for the company.

Shifting to the future, estimates from the ten analysts covering the company suggest earnings should grow by 64% over the next year. That's shaping up to be materially higher than the 23% growth forecast for the broader market.

With this information, we can see why Giga-Byte Technology 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

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.

As we suspected, our examination of Giga-Byte Technology'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.

There are also other vital risk factors to consider before investing and we've discovered 3 warning signs for Giga-Byte Technology that you should be aware of.

If these risks are making you reconsider your opinion on Giga-Byte Technology, 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.