When close to half the companies in Taiwan have price-to-earnings ratios (or “P/E’s”) above 23x, you may consider Tripod Technology Corporation (TWSE:3044) as an attractive investment with its 16.5x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it’s justified.
Tripod Technology certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. One possibility is that the P/E is low because investors think the company’s earnings are going to fall away like everyone else’s soon. If you like the company, you’d be hoping this isn’t the case so that you could potentially pick up some stock while it’s out of favour.
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Does Growth Match The Low P/E?
There’s an inherent assumption that a company should underperform the market for P/E ratios like Tripod Technology’s to be considered reasonable.
If we review the last year of earnings growth, the company posted a worthy increase of 15%. Still, EPS has barely risen at all in aggregate from three years ago, which is not ideal. Therefore, it’s fair to say that earnings growth has been inconsistent recently for the company.
Shifting to the future, estimates from the four analysts covering the company suggest earnings should grow by 21% each year over the next three years. That’s shaping up to be materially higher than the 12% per year growth forecast for the broader market.
With this information, we find it odd that Tripod Technology is trading at a P/E lower than the market. It looks like most investors are not convinced at all that the company can achieve future growth expectations.
The Final Word
Using the price-to-earnings ratio alone to determine if you should sell your stock isn’t sensible, however it can be a practical guide to the company’s future prospects.
Our examination of Tripod Technology’s analyst forecasts revealed that its superior earnings outlook isn’t contributing to its P/E anywhere near as much as we would have predicted. There could be some major unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.
There are also other vital risk factors to consider before investing and we’ve discovered 1 warning sign for Tripod Technology that you should be aware of.
If you’re unsure about the strength of Tripod Technology’s business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
Valuation is complex, but we’re helping make it simple.
Find out whether Tripod Technology is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.
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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.
