How Does Amkor Technology’s (NASDAQ:AMKR) P/E Compare To Its Industry, After Its Big Share Price Gain?

Amkor Technology (NASDAQ:AMKR) shareholders are no doubt pleased to see that the share price has bounced 32% in the last month alone, although it is still down 15% over the last quarter. And the full year gain of 21% isn’t too shabby, either!

Assuming no other changes, a sharply higher share price makes a stock less attractive to potential buyers. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. So some would prefer to hold off buying when there is a lot of optimism towards a stock. Perhaps the simplest way to get a read on investors’ expectations of a business is to look at its Price to Earnings Ratio (PE Ratio). A high P/E ratio means that investors have a high expectation about future growth, while a low P/E ratio means they have low expectations about future growth.

Check out our latest analysis for Amkor Technology

Does Amkor Technology Have A Relatively High Or Low P/E For Its Industry?

We can tell from its P/E ratio of 11.25 that sentiment around Amkor Technology isn’t particularly high. If you look at the image below, you can see Amkor Technology has a lower P/E than the average (30.7) in the semiconductor industry classification.

NasdaqGS:AMKR Price Estimation Relative to Market May 4th 2020
NasdaqGS:AMKR Price Estimation Relative to Market May 4th 2020

This suggests that market participants think Amkor Technology will underperform other companies in its industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.

How Growth Rates Impact P/E Ratios

Generally speaking the rate of earnings growth has a profound impact on a company’s P/E multiple. If earnings are growing quickly, then the ‘E’ in the equation will increase faster than it would otherwise. And in that case, the P/E ratio itself will drop rather quickly. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

Amkor Technology’s earnings made like a rocket, taking off 120% last year. Having said that, if we look back three years, EPS growth has averaged a comparatively less impressive 11%.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. That means it doesn’t take debt or cash into account. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

While growth expenditure doesn’t always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.

Is Debt Impacting Amkor Technology’s P/E?

Amkor Technology has net debt worth 22% of its market capitalization. That’s enough debt to impact the P/E ratio a little; so keep it in mind if you’re comparing it to companies without debt.

The Verdict On Amkor Technology’s P/E Ratio

Amkor Technology’s P/E is 11.3 which is below average (14.4) in the US market. The company hasn’t stretched its balance sheet, and earnings growth was good last year. If the company can continue to grow earnings, then the current P/E may be unjustifiably low. What is very clear is that the market has become more optimistic about Amkor Technology over the last month, with the P/E ratio rising from 8.5 back then to 11.3 today. If you like to buy stocks that have recently impressed the market, then this one might be a candidate; but if you prefer to invest when there is ‘blood in the streets’, then you may feel the opportunity has passed.

Investors should be looking to buy stocks that the market is wrong about. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.

Of course you might be able to find a better stock than Amkor Technology. So you may wish to see this free collection of other companies that have grown earnings strongly.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

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