Aurotek Corporation's (TWSE:6215) Shares Climb 25% But Its Business Is Yet to Catch Up

Aurotek Corporation (TWSE:6215) shares have continued their recent momentum with a 25% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 34%.

Since its price has surged higher, Aurotek may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 38x, since almost half of all companies in Taiwan have P/E ratios under 23x and even P/E's lower than 15x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

For instance, Aurotek's receding earnings in recent times would have to be some food for thought. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Aurotek

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Aurotek's earnings, revenue and cash flow.

Does Growth Match The High P/E?

The only time you'd be truly comfortable seeing a P/E as steep as Aurotek's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered a frustrating 63% decrease to the company's bottom line. At least EPS has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Comparing that to the market, which is predicted to deliver 26% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

With this information, we find it concerning that Aurotek is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. 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 Key Takeaway

Shares in Aurotek have built up some good momentum lately, which has really inflated its P/E. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Aurotek currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. When we see earnings heading backwards and underperforming the market forecasts, 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.

You always need to take note of risks, for example - Aurotek has 3 warning signs we think you should be aware of.

If you're unsure about the strength of Aurotek'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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