HD Renewable Energy Co., Ltd. (TWSE:6873) looks right on target with 52% price increase

HD Renewable Energy Co., Ltd. (TWSE:6873) shares have had a truly impressive month, gaining 52% after an earlier period of uncertainty. The past month is the culmination of a massive 132% gain over the past year.

After such a large jump in price, and considering that about half of Taiwanese companies have price-to-earnings (or “P/E”) ratios below 23x, you might consider HD Renewable Energy as a stock to potentially avoid due to its 34.8x P/E ratio. Although it’s not wise to simply take the P/E at face value, as there may be an explanation for why it’s so high.

With earnings growth in positive territory compared to the declining earnings of most peers, HD Renewable Energy has been doing quite well recently. It seems that many expect the company to continue to defy the broader market headwinds, which has increased investors’ willingness to pay for the stock. You’d really hope so, otherwise you’d be paying a pretty high price for no particular reason.

Check out our latest analysis for HD Renewable Energy

Want a complete picture of analyst estimates for the company? Then our free HD’s Renewable Energy Report will help you discover what’s on the horizon.

Does growth go hand in hand with a high P/E ratio?

To justify its P/E ratio, HD Renewable Energy would need to deliver impressive, above-market growth.

If we first look back, we can see that there has been almost no growth in earnings per share for the company over the past year. Although, encouragingly, EPS is up 71% overall compared to three years ago, despite the last 12 months. As such, shareholders would probably welcome these medium-term earnings growth rates.

Moving forward, estimates from two analysts covering the company suggest that earnings should grow by 70% over the next year. Meanwhile, the rest of the market is expected to grow by only 24%, which is noticeably less attractive.

In light of this, it’s understandable that HD Renewable Energy’s P/E is higher than most peers. Clearly, shareholders aren’t keen on getting rid of something that potentially has a more promising future ahead of it.

What can we learn from HD Renewable Energy’s P/E ratio?

HD Renewable Energy’s strong run up the stock has lifted the company’s P/E to a fairly high level. We generally prefer to limit our use of the P/E ratio to determining what the market thinks of the overall health of a company.

As we suspected, our study of HD Renewable Energy analyst forecasts showed that its improved earnings outlook is contributing to its high P/E ratio. At this stage, investors believe that the potential for earnings deterioration is not large enough to justify a lower P/E ratio. If these conditions remain unchanged, they will continue to provide strong support for the share price.

We don’t want to spoil the fun too much, but we also found 2 Warning Signs for HD Renewable Energy (You can’t ignore this!) something to remember.

Of course, you can also find better stocks than HD Renewable Energy. So you might want to see this free a group of other companies that have reasonable P/E ratios and have seen significant profit growth.

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This Simply Wall St article is for general information purposes only. Our commentary is based solely on historical data and analyst forecasts, and is based on an objective methodology. Our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or your financial situation. Our goal is to provide you with long-term, focused analysis based on fundamental data. Please note that our analysis may not reflect the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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