There's No Escaping Genius Electronic Optical Co., Ltd's (TWSE:3406) Muted Earnings

Genius Electronic Optical Co., Ltd's (TWSE:3406) price-to-earnings (or "P/E") ratio of 16.7x 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 24x and even P/E's above 41x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Genius Electronic Optical has been doing a reasonable job lately as its earnings haven't declined as much as most other companies. One possibility is that the P/E is low because investors think this relatively better earnings performance might be about to deteriorate significantly. You'd much rather the company wasn't bleeding earnings if you still believe in the business. In saying that, existing shareholders probably aren't pessimistic about the share price if the company's earnings continue outplaying the market.

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Is There Any Growth For Genius Electronic Optical?

The only time you'd be truly comfortable seeing a P/E as low as Genius Electronic Optical's is when the company's growth is on track to lag the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 6.2%. This has erased any of its gains during the last three years, with practically no change in EPS being achieved in total. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Looking ahead now, EPS is anticipated to climb by 12% during the coming year according to the seven analysts following the company. With the market predicted to deliver 27% growth , the company is positioned for a weaker earnings result.

With this information, we can see why Genius Electronic Optical 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.

The Bottom Line On Genius Electronic Optical's 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 Genius Electronic Optical 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.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Genius Electronic Optical that you should be aware of.

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

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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.