Some Confidence Is Lacking In Chunghwa Telecom Co., Ltd.'s (TWSE:2412) P/E

When close to half the companies in Taiwan have price-to-earnings ratios (or "P/E's") below 23x, you may consider Chunghwa Telecom Co., Ltd. (TWSE:2412) as a stock to potentially avoid with its 26.2x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Recent times have been more advantageous for Chunghwa Telecom as its earnings haven't fallen as much as the rest of the market. The P/E is probably high because investors think this comparatively better earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price, especially if earnings continue to dissolve.

Check out our latest analysis for Chunghwa Telecom

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Chunghwa Telecom.

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

In order to justify its P/E ratio, Chunghwa Telecom would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered a frustrating 1.0% decrease to the company's bottom line. Regardless, EPS has managed to lift by a handy 8.1% in aggregate from three years ago, thanks to the earlier period of growth. So we can start by confirming that the company has generally done a good job of growing earnings over that time, even though it had some hiccups along the way.

Looking ahead now, EPS is anticipated to climb by 3.0% per annum during the coming three years according to the five analysts following the company. That's shaping up to be materially lower than the 17% each year growth forecast for the broader market.

With this information, we find it concerning that Chunghwa Telecom is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

The Key Takeaway

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.

We've established that Chunghwa Telecom currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, 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.

Before you settle on your opinion, we've discovered 1 warning sign for Chunghwa Telecom that you should be aware of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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

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.