There's No Escaping HannStar Display Corporation's (TPE:6116) Muted Earnings Despite A 28% Share Price Rise

The HannStar Display Corporation (TPE:6116) share price has done very well over the last month, posting an excellent gain of 28%. The last month tops off a massive increase of 176% in the last year.

Although its price has surged higher, given close to half the companies in Taiwan have price-to-earnings ratios (or "P/E's") above 21x, you may still consider HannStar Display as an attractive investment with its 12.6x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

HannStar Display certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. 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.

Check out our latest analysis for HannStar Display

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on HannStar Display will help you shine a light on its historical performance.

Is There Any Growth For HannStar Display?

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

If we review the last year of earnings growth, the company posted a terrific increase of 395%. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 40% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

In contrast to the company, the rest of the market is expected to grow by 25% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

With this information, we are not surprised that HannStar Display is trading at a P/E lower than the market. However, we think shrinking earnings are unlikely to lead to a stable P/E over the longer term, which could set up shareholders for future disappointment. Even just maintaining these prices could be difficult to achieve as recent earnings trends are already weighing down the shares.

What We Can Learn From HannStar Display's P/E?

HannStar Display's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

As we suspected, our examination of HannStar Display revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

It is also worth noting that we have found 2 warning signs for HannStar Display that you need to take into consideration.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20x).

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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. 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.
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