It's Down 30% But L&K Engineering Co., Ltd. (TWSE:6139) Could Be Riskier Than It Looks

L&K Engineering Co., Ltd. (TWSE:6139) shares have retraced a considerable 30% in the last month, reversing a fair amount of their solid recent performance. Regardless, last month's decline is barely a blip on the stock's price chart as it has gained a monstrous 341% in the last year.

After such a large drop in price, given about half the companies in Taiwan have price-to-earnings ratios (or "P/E's") above 24x, you may consider L&K Engineering as an attractive investment with its 20.5x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Recent times have been quite advantageous for L&K Engineering 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 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 L&K Engineering

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 L&K Engineering's earnings, revenue and cash flow.

How Is L&K Engineering's Growth Trending?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 189% last year. Pleasingly, EPS has also lifted 717% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

This is in contrast to the rest of the market, which is expected to grow by 26% over the next year, materially lower than the company's recent medium-term annualised growth rates.

With this information, we find it odd that L&K Engineering is trading at a P/E lower than the market. It looks like most investors are not convinced the company can maintain its recent growth rates.

The Bottom Line On L&K Engineering's P/E

L&K Engineering's P/E has taken a tumble along with its share price. 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 L&K Engineering revealed its three-year earnings trends aren't contributing to its P/E anywhere near as much as we would have predicted, given they look better than current market expectations. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this positive performance. It appears many are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

We don't want to rain on the parade too much, but we did also find 3 warning signs for L&K Engineering (1 is a bit concerning!) that you need to be mindful of.

If you're unsure about the strength of L&K Engineering's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.