SINBON Electronics Co., Ltd.'s (TWSE:3023) Share Price Not Quite Adding Up

There wouldn't be many who think SINBON Electronics Co., Ltd.'s (TWSE:3023) price-to-earnings (or "P/E") ratio of 18.5x is worth a mention when the median P/E in Taiwan is similar at about 20x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

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SINBON Electronics could be doing better as it's been growing earnings less than most other companies lately. One possibility is that the P/E is moderate because investors think this lacklustre earnings performance will turn around. If not, then existing shareholders may be a little nervous about the viability of the share price.

See our latest analysis for SINBON Electronics

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How Is SINBON Electronics' Growth Trending?

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

Retrospectively, the last year delivered a decent 7.2% gain to the company's bottom line. The latest three year period has also seen an excellent 47% overall rise in EPS, aided somewhat by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the seven analysts covering the company suggest earnings should grow by 13% per year over the next three years. With the market predicted to deliver 22% growth per annum, the company is positioned for a weaker earnings result.

With this information, we find it interesting that SINBON Electronics is trading at a fairly similar P/E to the market. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Final Word

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that SINBON Electronics currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. 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. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for SINBON Electronics that you should be aware of.

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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.