L.K. Technology Holdings Limited (HKG:558) shares have had a horrible month, losing 26% after a relatively good period beforehand. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 12% in that time.
Even after such a large drop in price, given about half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") above 11x, you may still consider L.K. Technology Holdings as an attractive investment with its 8.3x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.
Our free stock report includes 2 warning signs investors should be aware of before investing in L.K. Technology Holdings. Read for free now.L.K. Technology Holdings hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.
Check out our latest analysis for L.K. Technology Holdings
Does Growth Match The Low P/E?
The only time you'd be truly comfortable seeing a P/E as low as L.K. Technology Holdings' is when the company's growth is on track to lag the market.
Retrospectively, the last year delivered a frustrating 7.7% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 24% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.
Shifting to the future, estimates from the six analysts covering the company suggest earnings should grow by 9.9% per year over the next three years. Meanwhile, the rest of the market is forecast to expand by 14% per year, which is noticeably more attractive.
In light of this, it's understandable that L.K. Technology Holdings' P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.
The Final Word
L.K. Technology Holdings' P/E has taken a tumble along with its share price. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
We've established that L.K. Technology Holdings maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. 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.
It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with L.K. Technology Holdings (at least 1 which is significant), and understanding these should be part of your investment process.
If you're unsure about the strength of L.K. Technology Holdings' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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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.