Novatek Microelectronics Corp.'s (TWSE:3034) Shares Lagging The Market But So Is The Business

Novatek Microelectronics Corp.'s (TWSE:3034) price-to-earnings (or "P/E") ratio of 15.5x 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 23x and even P/E's above 39x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

With earnings that are retreating more than the market's of late, Novatek Microelectronics has been very sluggish. The P/E is probably low because investors think this poor earnings performance isn't going to improve at all. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. Or at the very least, you'd be hoping the earnings slide doesn't get any worse if your plan is to pick up some stock while it's out of favour.

View our latest analysis for Novatek Microelectronics

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Does Growth Match The Low P/E?

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

Retrospectively, the last year delivered a frustrating 17% decrease to the company's bottom line. However, a few very strong years before that means that it was still able to grow EPS by an impressive 97% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Turning to the outlook, the next three years should generate growth of 4.6% per annum as estimated by the analysts watching the company. With the market predicted to deliver 15% growth per annum, the company is positioned for a weaker earnings result.

With this information, we can see why Novatek Microelectronics is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

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

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

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. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

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

Of course, you might also be able to find a better stock than Novatek Microelectronics. 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.