There's No Escaping PAX Global Technology Limited's (HKG:327) Muted Earnings Despite A 27% Share Price Rise

The PAX Global Technology Limited (HKG:327) share price has done very well over the last month, posting an excellent gain of 27%. Unfortunately, despite the strong performance over the last month, the full year gain of 3.2% isn't as attractive.

Even after such a large jump in price, PAX Global Technology may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 9x, since almost half of all companies in Hong Kong have P/E ratios greater than 12x and even P/E's higher than 24x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

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While the market has experienced earnings growth lately, PAX Global Technology's earnings have gone into reverse gear, which is not great. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. 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 PAX Global Technology

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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 PAX Global Technology's to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 38%. As a result, earnings from three years ago have also fallen 32% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 11% per year as estimated by the sole analyst watching the company. That's shaping up to be materially lower than the 14% per year growth forecast for the broader market.

In light of this, it's understandable that PAX Global Technology's P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Bottom Line On PAX Global Technology's P/E

The latest share price surge wasn't enough to lift PAX Global Technology'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.

We've established that PAX Global Technology maintains its low P/E on the weakness of its forecast growth being lower than the wider market, 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.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for PAX Global Technology that you should be aware of.

If you're unsure about the strength of PAX Global Technology'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.