Foxconn Industrial Internet Co., Ltd.'s (SHSE:601138) Price Is Right But Growth Is Lacking After Shares Rocket 26%

The Foxconn Industrial Internet Co., Ltd. (SHSE:601138) 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 89% in the last year.

Although its price has surged higher, Foxconn Industrial Internet's price-to-earnings (or "P/E") ratio of 16.6x might still 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 30x and even P/E's above 53x 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.

Foxconn Industrial Internet certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. 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.

See our latest analysis for Foxconn Industrial Internet

Keen to find out how analysts think Foxconn Industrial Internet's future stacks up against the industry? In that case, our free report is a great place to start.

Does Growth Match The Low P/E?

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

Taking a look back first, we see that the company managed to grow earnings per share by a handy 5.9% last year. EPS has also lifted 28% 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.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 10.0% each year over the next three years. With the market predicted to deliver 22% growth per year, the company is positioned for a weaker earnings result.

With this information, we can see why Foxconn Industrial Internet is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

What We Can Learn From Foxconn Industrial Internet's P/E?

The latest share price surge wasn't enough to lift Foxconn Industrial Internet's P/E close to the market median. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Foxconn Industrial Internet's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 1 warning sign for Foxconn Industrial Internet you should be aware of.

You might be able to find a better investment than Foxconn Industrial Internet. 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.