Insufficient Growth At Novatek Microelectronics Corp. (TWSE:3034) Hampers Share Price

When close to half the companies in Taiwan have price-to-earnings ratios (or "P/E's") above 23x, you may consider Novatek Microelectronics Corp. (TWSE:3034) as an attractive investment with its 14.6x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

Novatek Microelectronics certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. 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.

See our latest analysis for Novatek Microelectronics

Want the full picture on analyst estimates for the company? Then our free report on Novatek Microelectronics will help you uncover what's on the horizon.

How Is Novatek Microelectronics' Growth Trending?

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

Taking a look back first, we see that the company managed to grow earnings per share by a handy 10% last year. Ultimately though, it couldn't turn around the poor performance of the prior period, with EPS shrinking 3.2% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 4.6% per annum during the coming three years according to the analysts following the company. That's shaping up to be materially lower than the 13% per year growth forecast for the broader market.

With this information, we can see why Novatek Microelectronics is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

What We Can Learn From Novatek Microelectronics' P/E?

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.

We've established that Novatek Microelectronics maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

Plus, you should also learn about this 1 warning sign we've spotted with Novatek Microelectronics.

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

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

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.