It's A Story Of Risk Vs Reward With Gentex Corporation (NASDAQ:GNTX)

With a price-to-earnings (or "P/E") ratio of 13.4x Gentex Corporation (NASDAQ:GNTX) may be sending bullish signals at the moment, given that almost half of all companies in the United States have P/E ratios greater than 19x and even P/E's higher than 33x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

We check all companies for important risks. See what we found for Gentex in our free report.

Gentex could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. If you still 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.

View our latest analysis for Gentex

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Gentex.

How Is Gentex's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as low as Gentex'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 9.2%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 22% overall rise in EPS. 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 climb by 12% each year during the coming three years according to the ten analysts following the company. Meanwhile, the rest of the market is forecast to expand by 10% per annum, which is not materially different.

In light of this, it's peculiar that Gentex's P/E sits below the majority of other companies. It may be that most investors are not convinced the company can achieve future growth expectations.

The Final Word

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.

Our examination of Gentex's analyst forecasts revealed that its market-matching earnings outlook isn't contributing to its P/E as much as we would have predicted. When we see an average earnings outlook with market-like growth, we assume potential risks are what might be placing pressure on the P/E ratio. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

A lot of potential risks can sit within a company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Gentex with six simple checks.

If you're unsure about the strength of Gentex'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.