What GMI Technology Inc.'s (TWSE:3312) P/E Is Not Telling You

It's not a stretch to say that GMI Technology Inc.'s (TWSE:3312) price-to-earnings (or "P/E") ratio of 22.2x right now seems quite "middle-of-the-road" compared to the market in Taiwan, where the median P/E ratio is around 21x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

Recent times have been quite advantageous for GMI Technology as its earnings have been rising very briskly. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If that doesn't eventuate, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

Check out our latest analysis for GMI Technology

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

Is There Some Growth For GMI Technology?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 37% last year. EPS has also lifted 15% 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.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 25% shows it's noticeably less attractive on an annualised basis.

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

The Bottom Line On GMI Technology's P/E

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 GMI Technology currently trades on a higher than expected P/E since its recent three-year growth is lower than the wider market forecast. Right now we are uncomfortable with the P/E as this earnings performance isn't likely to support a more positive sentiment for long. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.

Before you take the next step, you should know about the 3 warning signs for GMI Technology (1 is significant!) that we have uncovered.

If you're unsure about the strength of GMI Technology's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.