Ability Enterprise Co., Ltd. (TWSE:2374) shareholders have had their patience rewarded with a 28% share price jump in the last month. Looking back a bit further, it’s encouraging to see the stock is up 60% in the last year.
Following the firm bounce in price, given around half the companies in Taiwan have price-to-earnings ratios (or “P/E’s”) below 23x, you may consider Ability Enterprise as a stock to potentially avoid with its 33.8x 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 quite advantageous for Ability Enterprise as its earnings have been rising very briskly. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. 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 Ability Enterprise?
The only time you’d be truly comfortable seeing a P/E as high as Ability Enterprise’s 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 terrific increase of 102%. However, the latest three year period hasn’t been as great in aggregate as it didn’t manage to provide any growth at all. Accordingly, shareholders probably wouldn’t have been overly satisfied with the unstable medium-term growth rates.
Comparing that to the market, which is predicted to deliver 26% growth in the next 12 months, the company’s momentum is weaker based on recent medium-term annualised earnings results.
In light of this, it’s alarming that Ability Enterprise’s P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren’t willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.
What We Can Learn From Ability Enterprise’s P/E?
Ability Enterprise shares have received a push in the right direction, but its P/E is elevated too. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.
Our examination of Ability Enterprise revealed its three-year earnings trends aren’t impacting its high P/E anywhere near as much as we would have predicted, given they look worse than current market expectations. Right now we are increasingly uncomfortable with the high P/E as this earnings performance isn’t likely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it’s very challenging to accept these prices as being reasonable.
Many other vital risk factors can be found on the company’s balance sheet. Our free balance sheet analysis for Ability Enterprise with six simple checks will allow you to discover any risks that could be an issue.
You might be able to find a better investment than Ability 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).
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Find out whether Ability Enterprise 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.
