Investors Appear Satisfied With Silicon Motion Technology Corporation's (NASDAQ:SIMO) Prospects

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 19x, you may consider Silicon Motion Technology Corporation (NASDAQ:SIMO) as a stock to avoid entirely with its 36.5x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

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Silicon Motion Technology could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

View our latest analysis for Silicon Motion Technology

Want the full picture on analyst estimates for the company? Then our free report on Silicon Motion Technology will help you uncover what's on the horizon.

Is There Enough Growth For Silicon Motion Technology?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Silicon Motion Technology's to be considered reasonable.

If we review the last year of earnings, the company posted a result that saw barely any deviation from a year ago. Whilst it's an improvement, it wasn't enough to get the company out of the hole it was in, with earnings down 65% overall from three years ago. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 28% per annum as estimated by the ten analysts watching the company. With the market only predicted to deliver 11% per year, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Silicon Motion Technology's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Bottom Line On Silicon Motion Technology's P/E

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.

As we suspected, our examination of Silicon Motion Technology's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

You always need to take note of risks, for example - Silicon Motion Technology has 1 warning sign we think you should be aware of.

You might be able to find a better investment than Silicon Motion Technology. 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.