Lacklustre Performance Is Driving Lemtech Holdings Co., Limited's (TWSE:4912) 26% Price Drop

Lemtech Holdings Co., Limited (TWSE:4912) shareholders that were waiting for something to happen have been dealt a blow with a 26% share price drop in the last month. Indeed, the recent drop has reduced its annual gain to a relatively sedate 2.1% over the last twelve months.

Since its price has dipped substantially, Lemtech Holdings may be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 18x, since almost half of all companies in Taiwan have P/E ratios greater than 21x and even P/E's higher than 37x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Lemtech Holdings has been doing a good job lately as it's been growing earnings at a solid pace. One possibility is that the P/E is low because investors think this respectable earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be optimistic about the future direction of the share price.

Check out our latest analysis for Lemtech Holdings

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 Lemtech Holdings' earnings, revenue and cash flow.

How Is Lemtech Holdings' Growth Trending?

There's an inherent assumption that a company should underperform the market for P/E ratios like Lemtech Holdings' to be considered reasonable.

If we review the last year of earnings growth, the company posted a worthy increase of 14%. Still, lamentably EPS has fallen 51% in aggregate from three years ago, which is disappointing. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 24% shows it's an unpleasant look.

In light of this, it's understandable that Lemtech Holdings' P/E would sit below the majority of other companies. However, we think shrinking earnings are unlikely to lead to a stable P/E over the longer term, which could set up shareholders for future disappointment. Even just maintaining these prices could be difficult to achieve as recent earnings trends are already weighing down the shares.

The Bottom Line On Lemtech Holdings' P/E

Lemtech Holdings' recently weak share price has pulled its P/E below most other companies. 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 Lemtech Holdings 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.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Lemtech Holdings (1 is significant!) that you need to be mindful of.

Of course, you might also be able to find a better stock than Lemtech Holdings. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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