Asia Optical Co., Inc. (TWSE:3019) Shares May Have Slumped 26% But Getting In Cheap Is Still Unlikely

Asia Optical Co., Inc. (TWSE:3019) shareholders won't be pleased to see that the share price has had a very rough month, dropping 26% and undoing the prior period's positive performance. Of course, over the longer-term many would still wish they owned shares as the stock's price has soared 133% in the last twelve months.

In spite of the heavy fall in price, given around half the companies in Taiwan have price-to-earnings ratios (or "P/E's") below 19x, you may still consider Asia Optical as a stock to potentially avoid with its 25.9x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's exceedingly strong of late, Asia Optical has been doing very well. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Asia Optical

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

Is There Enough Growth For Asia Optical?

Asia Optical'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 growth, the company posted a terrific increase of 108%. EPS has also lifted 8.4% in aggregate from three years ago, mostly thanks to the last 12 months of growth. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

This is in contrast to the rest of the market, which is expected to grow by 18% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it concerning that Asia Optical is trading at a P/E higher than the market. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Bottom Line On Asia Optical's P/E

Despite the recent share price weakness, Asia Optical's P/E remains higher than most other companies. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of Asia Optical revealed its three-year earnings trends aren't impacting its high P/E anywhere near as much as we would have predicted, given they look worse than current market expectations. Right now we are increasingly uncomfortable with the high P/E as this earnings performance isn't likely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Asia Optical (1 makes us a bit uncomfortable) you should be aware of.

Of course, you might also be able to find a better stock than Asia Optical. 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.