Those holding Motic (Xiamen) Electric Group Co.,Ltd (SZSE:300341) shares would be relieved that the share price has rebounded 28% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 8.6% over the last year.
In spite of the firm bounce in price, given about half the companies in China have price-to-earnings ratios (or "P/E's") above 32x, you may still consider Motic (Xiamen) Electric GroupLtd as an attractive investment with its 27.1x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
For example, consider that Motic (Xiamen) Electric GroupLtd's financial performance has been poor lately as its earnings have been in decline. One possibility is that the P/E is low because investors think the company won't do enough to avoid underperforming the broader market in the near future. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.
Does Growth Match The Low P/E?
Motic (Xiamen) Electric GroupLtd's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.
Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 18%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 43% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.
Comparing that to the market, which is predicted to deliver 40% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.
In light of this, it's understandable that Motic (Xiamen) Electric GroupLtd's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.
What We Can Learn From Motic (Xiamen) Electric GroupLtd's P/E?
The latest share price surge wasn't enough to lift Motic (Xiamen) Electric GroupLtd's P/E close to the market median. 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 Motic (Xiamen) Electric GroupLtd maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.
It is also worth noting that we have found 1 warning sign for Motic (Xiamen) Electric GroupLtd that you need to take into consideration.
If these risks are making you reconsider your opinion on Motic (Xiamen) Electric GroupLtd, 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.