When close to half the companies in Taiwan have price-to-earnings ratios (or “P/E’s”) below 18x, you may consider Thermaltake Technology Co., Ltd. (GTSM:3540) as a stock to avoid entirely with its 58x P/E ratio. Nonetheless, we’d need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.
As an illustration, earnings have deteriorated at Thermaltake Technology over the last year, which is not ideal at all. One possibility is that the P/E is high because investors think the company will still do 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.
How Does Thermaltake Technology’s P/E Ratio Compare To Its Industry Peers?
It’s plausible that Thermaltake Technology’s particularly high P/E ratio could be a result of tendencies within its own industry. You’ll notice in the figure below that P/E ratios in the Tech industry are similar to the market. So unfortunately this doesn’t provide a lot to explain the company’s ratio right now. Ordinarily, the majority of companies’ P/E’s would be constrained by the general conditions within the Tech industry. Still, the strength of the company’s earnings will most likely determine where its P/E shall sit.
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 Thermaltake Technology’s earnings, revenue and cash flow.
Is There Enough Growth For Thermaltake Technology?
There’s an inherent assumption that a company should far outperform the market for P/E ratios like Thermaltake Technology’s to be considered reasonable.
Retrospectively, the last year delivered a frustrating 40% decrease to the company’s bottom line. The last three years don’t look nice either as the company has shrunk EPS by 24% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.
Comparing that to the market, which is predicted to deliver 14% growth in the next 12 months, the company’s downward momentum based on recent medium-term earnings results is a sobering picture.
With this information, we find it concerning that Thermaltake Technology 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.
What We Can Learn From Thermaltake Technology’s P/E?
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 Thermaltake Technology revealed its shrinking earnings over the medium-term aren’t impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve markedly, it’s very challenging to accept these prices as being reasonable.
You should always think about risks. Case in point, we’ve spotted 3 warning signs for Thermaltake Technology you should be aware of, and 1 of them can’t be ignored.
It’s important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20x).
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This article by Simply Wall St is general in nature. 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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