Market Might Still Lack Some Conviction On BOE Varitronix Limited (HKG:710) Even After 28% Share Price Boost

BOE Varitronix Limited (HKG:710) shareholders have had their patience rewarded with a 28% share price jump in the last month. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 14% over that time.

Although its price has surged higher, it's still not a stretch to say that BOE Varitronix's price-to-earnings (or "P/E") ratio of 10.5x right now seems quite "middle-of-the-road" compared to the market in Hong Kong, where the median P/E ratio is around 10x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

BOE Varitronix hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. One possibility is that the P/E is moderate because investors think this poor earnings performance will turn around. If not, then existing shareholders may be a little nervous about the viability of the share price.

Check out our latest analysis for BOE Varitronix

Want the full picture on analyst estimates for the company? Then our free report on BOE Varitronix will help you uncover what's on the horizon.

How Is BOE Varitronix's Growth Trending?

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 18% decrease to the company's bottom line. Still, the latest three year period has seen an excellent 184% overall rise in EPS, in spite of its unsatisfying short-term performance. 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.

Shifting to the future, estimates from the eight analysts covering the company suggest earnings should grow by 16% each year over the next three years. Meanwhile, the rest of the market is forecast to only expand by 12% 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.

The Final Word

BOE Varitronix appears to be back in favour with a solid price jump getting its P/E back in line with most other companies. 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.

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.

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

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.