Investors Don't See Light At End Of China Wire & Cable Co., Ltd.'s (TWSE:1603) Tunnel

China Wire & Cable Co., Ltd.'s (TWSE:1603) price-to-earnings (or "P/E") ratio of 11.3x might make it look like a buy right now compared to the market in Taiwan, where around half of the companies have P/E ratios above 21x and even P/E's above 36x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

Recent times have been quite advantageous for China Wire & Cable as its earnings have been rising very briskly. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for China Wire & Cable

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 China Wire & Cable's earnings, revenue and cash flow.

Is There Any Growth For China Wire & Cable?

The only time you'd be truly comfortable seeing a P/E as low as China Wire & Cable's is when the company's growth is on track to lag the market.

Retrospectively, the last year delivered an exceptional 47% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 31% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 24% shows it's noticeably less attractive on an annualised basis.

With this information, we can see why China Wire & Cable is trading at a P/E lower than the market. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

The Key Takeaway

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.

As we suspected, our examination of China Wire & Cable revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

We don't want to rain on the parade too much, but we did also find 1 warning sign for China Wire & Cable that you need to be mindful of.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com