The Loctek Ergonomic Technology Corp. (SZSE:300729) share price has done very well over the last month, posting an excellent gain of 26%. Looking back a bit further, it's encouraging to see the stock is up 44% in the last year.
Even after such a large jump in price, Loctek Ergonomic Technology's price-to-earnings (or "P/E") ratio of 9.7x might still make it look like a strong buy right now compared to the market in China, where around half of the companies have P/E ratios above 36x and even P/E's above 65x 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 so limited.
With its earnings growth in positive territory compared to the declining earnings of most other companies, Loctek Ergonomic Technology has been doing quite well of late. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. 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.
View our latest analysis for Loctek Ergonomic Technology
Is There Any Growth For Loctek Ergonomic Technology?
In order to justify its P/E ratio, Loctek Ergonomic Technology would need to produce anemic growth that's substantially trailing the market.
Taking a look back first, we see that the company grew earnings per share by an impressive 163% last year. The strong recent performance means it was also able to grow EPS by 128% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
Looking ahead now, EPS is anticipated to slump, contracting by 13% during the coming year according to the four analysts following the company. That's not great when the rest of the market is expected to grow by 44%.
In light of this, it's understandable that Loctek Ergonomic Technology's P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.
The Final Word
Even after such a strong price move, Loctek Ergonomic Technology's P/E still trails the rest of the market significantly. 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 Loctek Ergonomic Technology maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.
Having said that, be aware Loctek Ergonomic Technology is showing 3 warning signs in our investment analysis, and 1 of those doesn't sit too well with us.
You might be able to find a better investment than Loctek Ergonomic 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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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.
