BOE Varitronix Limited's (HKG:710) Shares Leap 27% Yet They're Still Not Telling The Full Story

BOE Varitronix Limited (HKG:710) shareholders would be excited to see that the share price has had a great month, posting a 27% gain and recovering from prior weakness. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 47% in the last twelve months.

In spite of the firm bounce in price, you could still be forgiven for feeling indifferent about BOE Varitronix's P/E ratio of 10.2x, since the median price-to-earnings (or "P/E") ratio in Hong Kong is also close to 10x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

While the market has experienced earnings growth lately, BOE Varitronix's earnings have gone into reverse gear, which is not great. It might be that many expect the dour earnings performance to strengthen positively, which has kept the P/E from falling. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

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Is There Some Growth For BOE Varitronix?

In order to justify its P/E ratio, BOE Varitronix would need to produce growth that's similar to the market.

Retrospectively, the last year delivered a frustrating 23% 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 543% in total over the last three years. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Looking ahead now, EPS is anticipated to climb by 20% per annum during the coming three years according to the seven analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 16% each year, which is noticeably less attractive.

With this information, we find it interesting that BOE Varitronix is trading at a fairly similar P/E to the market. It may be that most investors aren't convinced the company can achieve future growth expectations.

What We Can Learn From BOE Varitronix's P/E?

Its shares have lifted substantially and now BOE Varitronix's P/E is also back up to the market median. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

Our examination of BOE Varitronix's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E as much as we would have predicted. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing pressure on the P/E ratio. It appears some are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

The company's balance sheet is another key area for risk analysis. Our free balance sheet analysis for BOE Varitronix with six simple checks will allow you to discover any risks that could be an issue.

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.