Nidec Chaun-Choung Technology Corporation's (TWSE:6230) Popularity With Investors Under Threat As Stock Sinks 32%

Nidec Chaun-Choung Technology Corporation (TWSE:6230) shareholders that were waiting for something to happen have been dealt a blow with a 32% share price drop in the last month. Looking at the bigger picture, even after this poor month the stock is up 38% in the last year.

Even after such a large drop in price, Nidec Chaun-Choung Technology's price-to-earnings (or "P/E") ratio of 34.3x might still make it look like a strong sell right now compared to the market in Taiwan, where around half of the companies have P/E ratios below 22x and even P/E's below 15x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Nidec Chaun-Choung Technology has been struggling lately as its earnings have declined faster than most other companies. It might be that many expect the dismal earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be very nervous about the viability of the share price.

See our latest analysis for Nidec Chaun-Choung Technology

Keen to find out how analysts think Nidec Chaun-Choung Technology's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Nidec Chaun-Choung Technology's Growth Trending?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Nidec Chaun-Choung Technology's to be considered reasonable.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 25%. This means it has also seen a slide in earnings over the longer-term as EPS is down 36% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Looking ahead now, EPS is anticipated to slump, contracting by 39% during the coming year according to the one analyst following the company. That's not great when the rest of the market is expected to grow by 23%.

With this information, we find it concerning that Nidec Chaun-Choung Technology is trading at a P/E higher than the market. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock at any price. There's a very good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the negative growth outlook.

The Key Takeaway

Nidec Chaun-Choung Technology's shares may have retreated, but its P/E is still flying high. 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 Nidec Chaun-Choung Technology currently trades on a much higher than expected P/E for a company whose earnings are forecast to decline. When we see a poor outlook with earnings heading backwards, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Nidec Chaun-Choung Technology you should know about.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.

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