There's Reason For Concern Over Elite Material Co., Ltd.'s (TWSE:2383) Massive 25% Price Jump

Elite Material Co., Ltd. (TWSE:2383) shareholders would be excited to see that the share price has had a great month, posting a 25% gain and recovering from prior weakness. The last 30 days bring the annual gain to a very sharp 38%.

Although its price has surged higher, there still wouldn't be many who think Elite Material's price-to-earnings (or "P/E") ratio of 20.7x is worth a mention when the median P/E in Taiwan is similar at about 21x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

Elite Material certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

View our latest analysis for Elite Material

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

Is There Some Growth For Elite Material?

There's an inherent assumption that a company should be matching the market for P/E ratios like Elite Material's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 78%. The latest three year period has also seen an excellent 73% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 13% during the coming year according to the analysts following the company. That's shaping up to be materially lower than the 24% growth forecast for the broader market.

In light of this, it's curious that Elite Material's P/E sits in line with the majority of other companies. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.

The Final Word

Elite Material appears to be back in favour with a solid price jump getting its P/E back in line with most other companies. 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.

Our examination of Elite Material's analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E 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 moderate P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

Before you take the next step, you should know about the 2 warning signs for Elite Material (1 can't be ignored!) that we have uncovered.

Of course, you might also be able to find a better stock than Elite Material. 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.