Hefei Meyer Optoelectronic Technology Inc.'s (SZSE:002690) price-to-earnings (or "P/E") ratio of 21.1x might make it look like a buy right now compared to the market in China, where around half of the companies have P/E ratios above 30x and even P/E's above 55x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.
While the market has experienced earnings growth lately, Hefei Meyer Optoelectronic Technology's earnings have gone into reverse gear, which is not great. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.
SZSE:002690 Price to Earnings Ratio vs Industry April 27th 2024 If you'd like to see what analysts are forecasting going forward, you should check out our free report on Hefei Meyer Optoelectronic Technology.
What Are Growth Metrics Telling Us About The Low P/E?
There's an inherent assumption that a company should underperform the market for P/E ratios like Hefei Meyer Optoelectronic Technology's to be considered reasonable.
Retrospectively, the last year delivered a frustrating 2.8% decrease to the company's bottom line. However, a few very strong years before that means that it was still able to grow EPS by an impressive 42% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.
Turning to the outlook, the next three years should generate growth of 14% per annum as estimated by the ten analysts watching the company. That's shaping up to be materially lower than the 21% per annum growth forecast for the broader market.
With this information, we can see why Hefei Meyer Optoelectronic Technology is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.
The Final Word
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.
As we suspected, our examination of Hefei Meyer Optoelectronic Technology's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.
Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Hefei Meyer Optoelectronic Technology that you should be aware of.
You might be able to find a better investment than Hefei Meyer Optoelectronic 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).
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