FIT Holding Co., Ltd. (TWSE:3712) Stock Rockets 25% As Investors Are Less Pessimistic Than Expected

Despite an already strong run, FIT Holding Co., Ltd. (TWSE:3712) shares have been powering on, with a gain of 25% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 57% in the last year.

After such a large jump in price, given close to half the companies in Taiwan have price-to-earnings ratios (or "P/E's") below 23x, you may consider FIT Holding as a stock to avoid entirely with its 37x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

For example, consider that FIT Holding's financial performance has been poor lately as its earnings have been in decline. One possibility is that the P/E is high because investors think the company will still do 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.

Check out our latest analysis for FIT Holding

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

Is There Enough Growth For FIT Holding?

There's an inherent assumption that a company should far outperform the market for P/E ratios like FIT Holding's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 41% decrease to the company's bottom line. Unfortunately, that's brought it right back to where it started three years ago with EPS growth being virtually non-existent overall during that time. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 24% shows it's noticeably less attractive on an annualised basis.

With this information, we find it concerning that FIT Holding 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. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Bottom Line On FIT Holding's P/E

The strong share price surge has got FIT Holding's P/E rushing to great heights as well. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of FIT Holding 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. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Having said that, be aware FIT Holding is showing 4 warning signs in our investment analysis, and 2 of those make us uncomfortable.

You might be able to find a better investment than FIT Holding. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com