Why Investors Shouldn't Be Surprised By Fositek Corp.'s (TWSE:6805) 31% Share Price Surge

Despite an already strong run, Fositek Corp. (TWSE:6805) shares have been powering on, with a gain of 31% in the last thirty days. The last month tops off a massive increase of 193% in the last year.

After such a large jump in price, Fositek's price-to-earnings (or "P/E") ratio of 75.8x might 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 21x and even P/E's below 14x 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.

Recent times have been advantageous for Fositek as its earnings have been rising faster than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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Is There Enough Growth For Fositek?

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

If we review the last year of earnings growth, the company posted a terrific increase of 47%. Pleasingly, EPS has also lifted 65% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the six analysts covering the company suggest earnings should grow by 126% over the next year. That's shaping up to be materially higher than the 25% growth forecast for the broader market.

In light of this, it's understandable that Fositek's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What We Can Learn From Fositek's P/E?

Fositek's P/E is flying high just like its stock has during the last month. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

As we suspected, our examination of Fositek's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

Having said that, be aware Fositek is showing 2 warning signs in our investment analysis, you should know about.

If you're unsure about the strength of Fositek'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.