With a median price-to-earnings (or “P/E”) ratio of close to 22x in Taiwan, you could be forgiven for feeling indifferent about Nien Made Enterprise Co., LTD.’s (TWSE:8464) P/E ratio of 20.4x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.
With earnings growth that’s superior to most other companies of late, Nien Made Enterprise has been doing relatively well. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.
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How Is Nien Made Enterprise’s Growth Trending?
In order to justify its P/E ratio, Nien Made Enterprise would need to produce growth that’s similar to the market.
Taking a look back first, we see that the company grew earnings per share by an impressive 15% last year. As a result, it also grew EPS by 23% in total over the last three years. Therefore, it’s fair to say the earnings growth recently has been respectable for the company.
Looking ahead now, EPS is anticipated to climb by 12% during the coming year according to the ten analysts following the company. Meanwhile, the rest of the market is forecast to expand by 24%, which is noticeably more attractive.
In light of this, it’s curious that Nien Made Enterprise’s P/E sits in line with the majority of other companies. Apparently many investors in the company are less bearish than analysts indicate and aren’t willing to let go of their stock right now. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.
The Key Takeaway
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.
We’ve established that Nien Made Enterprise currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. Right now we are uncomfortable with the P/E as the predicted future earnings aren’t likely to support a more positive sentiment for long. This places shareholders’ investments at risk and potential investors in danger of paying an unnecessary premium.
A lot of potential risks can sit within a company’s balance sheet. Take a look at our free balance sheet analysis for Nien Made Enterprise with six simple checks on some of these key factors.
You might be able to find a better investment than Nien Made Enterprise. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).
Valuation is complex, but we’re here to simplify it.
Discover if Nien Made Enterprise might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.
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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.
