Johnson Electric Holdings Limited (HKG:179) shares have retraced a considerable 27% in the last month, reversing a fair amount of their solid recent performance. Still, a bad month hasn't completely ruined the past year with the stock gaining 26%, which is great even in a bull market.
Although its price has dipped substantially, Johnson Electric Holdings may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 6.3x, since almost half of all companies in Hong Kong have P/E ratios greater than 11x and even P/E's higher than 21x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.
With earnings growth that's superior to most other companies of late, Johnson Electric Holdings has been doing relatively well. It might be that many expect the strong earnings performance to degrade substantially, 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.
Check out our latest analysis for Johnson Electric Holdings
Does Growth Match The Low P/E?
In order to justify its P/E ratio, Johnson Electric Holdings would need to produce sluggish growth that's trailing the market.
If we review the last year of earnings growth, the company posted a worthy increase of 6.8%. EPS has also lifted 13% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been respectable for the company.
Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 4.0% per year as estimated by the two analysts watching the company. With the market predicted to deliver 14% growth each year, that's a disappointing outcome.
In light of this, it's understandable that Johnson Electric Holdings' P/E would sit below the majority of other companies. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.
The Key Takeaway
The softening of Johnson Electric Holdings' shares means its P/E is now sitting at a pretty low level. 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 Johnson Electric Holdings 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. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.
We don't want to rain on the parade too much, but we did also find 3 warning signs for Johnson Electric Holdings (1 is concerning!) that you need to be mindful of.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.
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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.