What Is Greatech Technology Berhad's (KLSE:GREATEC) P/E Ratio After Its Share Price Tanked?

Greatech Technology Berhad (KLSE:GREATEC) shares have retraced a considerable 30% in the last month. But there's still good reason for shareholders to be content; the stock has gained 11% in the last 90 days. Zooming out, the recent drop wiped out a year's worth of gains, with the share price now back where it was a year ago.

Assuming nothing else has changed, a lower share price makes a stock more attractive to potential buyers. In the long term, share prices tend to follow earnings per share, but in the short term prices bounce around in response to short term factors (which are not always obvious). The implication here is that long term investors have an opportunity when expectations of a company are too low. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). A high P/E ratio means that investors have a high expectation about future growth, while a low P/E ratio means they have low expectations about future growth.

Check out our latest analysis for Greatech Technology Berhad

Does Greatech Technology Berhad Have A Relatively High Or Low P/E For Its Industry?

Greatech Technology Berhad's P/E is 21.26. You can see in the image below that the average P/E (21.0) for companies in the semiconductor industry is roughly the same as Greatech Technology Berhad's P/E.

Its P/E ratio suggests that Greatech Technology Berhad shareholders think that in the future it will perform about the same as other companies in its industry classification. The company could surprise by performing better than average, in the future. Checking factors such as director buying and selling. could help you form your own view on if that will happen.

How Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. When earnings grow, the 'E' increases, over time. And in that case, the P/E ratio itself will drop rather quickly. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

Greatech Technology Berhad's earnings made like a rocket, taking off 123% last year. The sweetener is that the annual five year growth rate of 66% is also impressive. With that kind of growth rate we would generally expect a high P/E ratio.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

Don't forget that the P/E ratio considers market capitalization. That means it doesn't take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.

So What Does Greatech Technology Berhad's Balance Sheet Tell Us?

With net cash of RM199m, Greatech Technology Berhad has a very strong balance sheet, which may be important for its business. Having said that, at 13% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.

The Verdict On Greatech Technology Berhad's P/E Ratio

Greatech Technology Berhad has a P/E of 21.3. That's higher than the average in its market, which is 12.3. The excess cash it carries is the gravy on top its fast EPS growth. So based on this analysis we'd expect Greatech Technology Berhad to have a high P/E ratio. Given Greatech Technology Berhad's P/E ratio has declined from 30.5 to 21.3 in the last month, we know for sure that the market is significantly less confident about the business today, than it was back then. For those who don't like to trade against momentum, that could be a warning sign, but a contrarian investor might want to take a closer look.

When the market is wrong about a stock, it gives savvy investors an opportunity. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.

You might be able to find a better buy than Greatech Technology Berhad. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.