Fewer Investors Than Expected Jumping On StarPower Semiconductor Ltd. (SHSE:603290)

StarPower Semiconductor Ltd.'s (SHSE:603290) price-to-earnings (or "P/E") ratio of 31.5x 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 38x and even P/E's above 73x 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.

StarPower Semiconductor has been struggling lately as its earnings have declined faster than most other companies. It seems that many are expecting the dismal earnings performance to persist, which has repressed the P/E. You'd much rather the company wasn't bleeding earnings if you still believe in the business. Or at the very least, you'd be hoping the earnings slide doesn't get any worse if your plan is to pick up some stock while it's out of favour.

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Does Growth Match The Low P/E?

There's an inherent assumption that a company should underperform the market for P/E ratios like StarPower Semiconductor's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 24% 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 102% 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.

Looking ahead now, EPS is anticipated to climb by 36% each year during the coming three years according to the analysts following the company. That's shaping up to be materially higher than the 20% per annum growth forecast for the broader market.

With this information, we find it odd that StarPower Semiconductor is trading at a P/E lower than the market. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

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.

We've established that StarPower Semiconductor currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.

We don't want to rain on the parade too much, but we did also find 2 warning signs for StarPower Semiconductor (1 is significant!) that you need to be mindful of.

If you're unsure about the strength of StarPower Semiconductor's 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.