Subdued Growth No Barrier To Reward Wool Industry Corporation's (TWSE:1423) Price

Simply Wall St · 10/15 22:28

With a price-to-earnings (or "P/E") ratio of 56.8x Reward Wool Industry Corporation (TWSE:1423) may be sending very bearish signals at the moment, given that almost half of all companies in Taiwan have P/E ratios under 21x and even P/E's lower than 14x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

The earnings growth achieved at Reward Wool Industry over the last year would be more than acceptable for most companies. One possibility is that the P/E is high because investors think this respectable earnings growth will be enough to outperform the broader market in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.

View our latest analysis for Reward Wool Industry

pe-multiple-vs-industry
TWSE:1423 Price to Earnings Ratio vs Industry October 15th 2024
We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Reward Wool Industry's earnings, revenue and cash flow.

Is There Enough Growth For Reward Wool Industry?

In order to justify its P/E ratio, Reward Wool Industry would need to produce outstanding growth well in excess of the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 16% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 88% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 24% shows it's an unpleasant look.

With this information, we find it concerning that Reward Wool Industry is trading at a P/E higher than the market. 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.

The Key Takeaway

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.

We've established that Reward Wool Industry currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Before you settle on your opinion, we've discovered 2 warning signs for Reward Wool Industry 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.