A Sliding Share Price Has Us Looking At Realtek Semiconductor Corp.'s (TPE:2379) P/E Ratio

Unfortunately for some shareholders, the Realtek Semiconductor (TPE:2379) share price has dived 36% in the last thirty days. The recent drop has obliterated the annual return, with the share price now down 9.0% over that longer period.

All else being equal, a share price drop should make a stock more attractive to potential investors. 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). So, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. 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.

View our latest analysis for Realtek Semiconductor

How Does Realtek Semiconductor's P/E Ratio Compare To Its Peers?

Realtek Semiconductor's P/E is 13.18. The image below shows that Realtek Semiconductor has a P/E ratio that is roughly in line with the semiconductor industry average (13.8).

That indicates that the market expects Realtek Semiconductor will perform roughly in line with other companies in its industry. 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

P/E ratios primarily reflect market expectations around earnings growth rates. Earnings growth means that in the future the 'E' will be higher. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

Realtek Semiconductor's earnings made like a rocket, taking off 54% last year. And earnings per share have improved by 26% annually, over the last three years. So you might say it really deserves to have an above-average P/E ratio.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

Don't forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.

Is Debt Impacting Realtek Semiconductor's P/E?

Realtek Semiconductor has net cash of NT$27b. This is fairly high at 33% of its market capitalization. That might mean balance sheet strength is important to the business, but should also help push the P/E a bit higher than it would otherwise be.

The Bottom Line On Realtek Semiconductor's P/E Ratio

Realtek Semiconductor trades on a P/E ratio of 13.2, which is fairly close to the TW market average of 13.1. Its net cash position is the cherry on top of its superb EPS growth. So at a glance we're a bit surprised that Realtek Semiconductor does not have a higher P/E ratio. All the more so, since analysts expect further profit growth. Click here to research this potential opportunity.. What can be absolutely certain is that the market has become significantly less optimistic about Realtek Semiconductor over the last month, with the P/E ratio falling from 20.5 back then to 13.2 today. For those who prefer to invest with the flow of momentum, that might be a bad sign, but for a contrarian, it may signal opportunity.

Investors should be looking to buy stocks that the market is wrong about. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. So this free visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.

But note: Realtek Semiconductor may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

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.