Formosa Prosonic Industries Berhad's (KLSE:FPI) Price Is Right But Growth Is Lacking After Shares Rocket 46%

Formosa Prosonic Industries Berhad (KLSE:FPI) shares have continued their recent momentum with a 46% gain in the last month alone. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 26% in the last twelve months.

Although its price has surged higher, given about half the companies in Malaysia have price-to-earnings ratios (or "P/E's") above 14x, you may still consider Formosa Prosonic Industries Berhad as an attractive investment with its 8.3x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

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For example, consider that Formosa Prosonic Industries Berhad's financial performance has been poor lately as its earnings have been in decline. One possibility is that the P/E is low because investors think the company won't do enough to avoid underperforming the broader market in the near future. 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.

Check out our latest analysis for Formosa Prosonic Industries Berhad

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Formosa Prosonic Industries Berhad's earnings, revenue and cash flow.

Is There Any Growth For Formosa Prosonic Industries Berhad?

In order to justify its P/E ratio, Formosa Prosonic Industries Berhad would need to produce sluggish growth that's trailing the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 3.8%. As a result, earnings from three years ago have also fallen 50% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Comparing that to the market, which is predicted to deliver 15% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

In light of this, it's understandable that Formosa Prosonic Industries Berhad's P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Key Takeaway

Formosa Prosonic Industries Berhad's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Formosa Prosonic Industries Berhad revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Formosa Prosonic Industries Berhad (at least 2 which are concerning), and understanding these should be part of your investment process.

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.