Radiant Opto-Electronics Corporation's (TWSE:6176) Shares Bounce 27% But Its Business Still Trails The Market

The Radiant Opto-Electronics Corporation (TWSE:6176) share price has done very well over the last month, posting an excellent gain of 27%. Looking back a bit further, it's encouraging to see the stock is up 68% in the last year.

Even after such a large jump in price, given about half the companies in Taiwan have price-to-earnings ratios (or "P/E's") above 23x, you may still consider Radiant Opto-Electronics as an attractive investment with its 15.6x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Radiant Opto-Electronics has been struggling lately as its earnings have declined faster than most other companies. The P/E is probably low because investors think this poor earnings performance isn't going to improve at all. You'd much rather the company wasn't bleeding earnings if you still believe in the business. 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 Radiant Opto-Electronics

Keen to find out how analysts think Radiant Opto-Electronics' future stacks up against the industry? In that case, our free report is a great place to start.

How Is Radiant Opto-Electronics' Growth Trending?

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

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 22%. At least EPS has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 13% during the coming year according to the four analysts following the company. That's shaping up to be materially lower than the 22% growth forecast for the broader market.

In light of this, it's understandable that Radiant Opto-Electronics' P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Final Word

Despite Radiant Opto-Electronics' shares building up a head of steam, its P/E still lags most other companies. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Radiant Opto-Electronics' analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 1 warning sign for Radiant Opto-Electronics you should be aware of.

You might be able to find a better investment than Radiant Opto-Electronics. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.