Monday, June 24, 2024

It’s A Story Of Risk Vs Reward With Formosa Sumco Technology Corporation (TWSE:3532)

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It’s not a stretch to say that Formosa Sumco Technology Corporation’s (TWSE:3532) price-to-earnings (or “P/E”) ratio of 23.2x right now seems quite “middle-of-the-road” compared to the market in Taiwan, where the median P/E ratio is around 23x. 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.

For example, consider that Formosa Sumco Technology’s financial performance has been poor lately as its earnings have been in decline. One possibility is that the P/E is moderate because investors think the company might still do enough to be in line with the broader market in the near future. If you like the company, you’d at least be hoping this is the case so that you could potentially pick up some stock while it’s not quite in favour.

View our latest analysis for Formosa Sumco Technology

TWSE:3532 Price to Earnings Ratio vs Industry June 11th 2024

Although there are no analyst estimates available for Formosa Sumco Technology, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Formosa Sumco Technology’s Growth Trending?

There’s an inherent assumption that a company should be matching the market for P/E ratios like Formosa Sumco Technology’s to be considered reasonable.

If we review the last year of earnings, dishearteningly the company’s profits fell to the tune of 37%. Still, the latest three year period has seen an excellent 139% overall rise in EPS, in spite of its unsatisfying short-term performance. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

This is in contrast to the rest of the market, which is expected to grow by 23% over the next year, materially lower than the company’s recent medium-term annualised growth rates.

With this information, we find it interesting that Formosa Sumco Technology is trading at a fairly similar P/E to the market. It may be that most investors are not convinced the company can maintain its recent growth rates.

The Key Takeaway

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 Formosa Sumco Technology currently trades on a lower than expected P/E since its recent three-year growth is higher than the wider market forecast. There could be some unobserved threats to earnings preventing the P/E ratio from matching this positive performance. It appears some are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

It is also worth noting that we have found 2 warning signs for Formosa Sumco Technology (1 shouldn’t be ignored!) that you need to take into consideration.

You might be able to find a better investment than Formosa Sumco Technology. 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 helping make it simple.

Find out whether Formosa Sumco 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.

View the Free Analysis

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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.

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