When close to half the companies in Singapore have price-to-earnings ratios (or "P/E's") above 11x, you may consider AnnAik Limited (Catalist:A52) as a highly attractive investment with its 4.6x P/E ratio. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

AnnAik certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

See our latest analysis for AnnAik

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on AnnAik will help you shine a light on its historical performance.

Does Growth Match The Low P/E?

The only time you'd be truly comfortable seeing a P/E as depressed as AnnAik's is when the company's growth is on track to lag the market decidedly.

If we review the last year of earnings growth, the company posted a terrific increase of 200%. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

In contrast to the company, the rest of the market is expected to decline by 1.0% over the next year, which puts the company's recent medium-term positive growth rates in a good light for now.

With this information, we find it very odd that AnnAik is trading at a P/E lower than the market. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

The Bottom Line On AnnAik's P/E

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that AnnAik currently trades on a much lower than expected P/E since its recent three-year earnings growth is beating forecasts for a struggling market. We think potential risks might be placing significant pressure on the P/E ratio and share price. One major risk is whether its earnings trajectory can keep outperforming under these tough market conditions. It appears many are indeed anticipating earnings instability, because this relative performance should normally provide a boost to the share price.

Before you settle on your opinion, we've discovered 3 warning signs for AnnAik (1 is concerning!) that you should be aware of.

If these risks are making you reconsider your opinion on AnnAik, explore our interactive list of high quality stocks to get an idea of what else is out there.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here