What Nidec Chaun-Choung Technology Corporation's (TWSE:6230) 59% Share Price Gain Is Not Telling You

Despite an already strong run, Nidec Chaun-Choung Technology Corporation (TWSE:6230) shares have been powering on, with a gain of 59% in the last thirty days. The last 30 days bring the annual gain to a very sharp 89%.

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 Nidec Chaun-Choung Technology as a stock to avoid entirely with its 43.3x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

With only a limited decrease in earnings compared to most other companies of late, Nidec Chaun-Choung Technology has been doing relatively well. The P/E is probably high because investors think this comparatively better earnings performance will continue. While you'd prefer that its earnings trajectory turned around, you'd at least be hoping it remains less negative than other companies, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Nidec Chaun-Choung Technology

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What Are Growth Metrics Telling Us About The High P/E?

Nidec Chaun-Choung Technology's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

Retrospectively, the last year delivered a frustrating 1.2% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 23% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the lone analyst covering the company suggest earnings growth is heading into negative territory, declining 56% over the next year. That's not great when the rest of the market is expected to grow by 26%.

In light of this, it's alarming that Nidec Chaun-Choung Technology's P/E sits above the majority of other companies. 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 Bottom Line On Nidec Chaun-Choung Technology's P/E

Shares in Nidec Chaun-Choung Technology have built up some good momentum lately, which has really inflated its P/E. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of Nidec Chaun-Choung Technology's analyst forecasts revealed that its outlook for shrinking earnings isn't impacting its high P/E anywhere near as much as we would have predicted. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings are highly unlikely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You should always think about risks. Case in point, we've spotted 2 warning signs for Nidec Chaun-Choung Technology you should be aware of.

Of course, you might also be able to find a better stock than Nidec Chaun-Choung Technology. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.