Taiwan Surface Mounting Technology Corp.'s (TWSE:6278) Low P/E No Reason For Excitement

With a price-to-earnings (or "P/E") ratio of 11.2x Taiwan Surface Mounting Technology Corp. (TWSE:6278) may be sending bullish signals at the moment, given that almost half of all companies in Taiwan have P/E ratios greater than 22x and even P/E's higher than 38x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

Taiwan Surface Mounting Technology could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

Check out our latest analysis for Taiwan Surface Mounting Technology

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How Is Taiwan Surface Mounting Technology's Growth Trending?

In order to justify its P/E ratio, Taiwan Surface Mounting Technology would need to produce sluggish growth that's trailing the market.

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 6.4%. Regardless, EPS has managed to lift by a handy 19% in aggregate from three years ago, thanks to the earlier period of growth. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been mostly respectable for the company.

Looking ahead now, EPS is anticipated to slump, contracting by 1.5% during the coming year according to the three analysts following the company. With the market predicted to deliver 23% growth , that's a disappointing outcome.

In light of this, it's understandable that Taiwan Surface Mounting Technology's P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

What We Can Learn From Taiwan Surface Mounting Technology's P/E?

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.

We've established that Taiwan Surface Mounting Technology maintains its low P/E on the weakness of its forecast for sliding earnings, 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. 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 Taiwan Surface Mounting Technology.

Of course, you might also be able to find a better stock than Taiwan Surface Mounting Technology. 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.