Far EasTone Telecommunications Co., Ltd.'s (TWSE:4904) Shares May Have Run Too Fast Too Soon

When close to half the companies in Taiwan have price-to-earnings ratios (or "P/E's") below 21x, you may consider Far EasTone Telecommunications Co., Ltd. (TWSE:4904) as a stock to potentially avoid with its 27.3x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

Far EasTone Telecommunications' earnings growth of late has been pretty similar to most other companies. One possibility is that the P/E is high because investors think this modest earnings performance will accelerate. If not, then existing shareholders may be a little nervous about the viability of the share price.

See our latest analysis for Far EasTone Telecommunications

Keen to find out how analysts think Far EasTone Telecommunications' future stacks up against the industry? In that case, our free report is a great place to start.

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

The only time you'd be truly comfortable seeing a P/E as high as Far EasTone Telecommunications' is when the company's growth is on track to outshine the market.

If we review the last year of earnings growth, the company posted a worthy increase of 5.3%. The latest three year period has also seen an excellent 37% overall rise in EPS, aided somewhat by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to climb by 8.5% per year during the coming three years according to the six analysts following the company. That's shaping up to be materially lower than the 16% per annum growth forecast for the broader market.

With this information, we find it concerning that Far EasTone Telecommunications 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 Final Word

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Far EasTone Telecommunications 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. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Before you take the next step, you should know about the 3 warning signs for Far EasTone Telecommunications that we have uncovered.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.