Earnings Working Against Franklin Wireless Corp.'s (NASDAQ:FKWL) Share Price Following 26% Dive

Franklin Wireless Corp. (NASDAQ:FKWL) shareholders that were waiting for something to happen have been dealt a blow with a 26% share price drop in the last month. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 61% loss during that time.

Following the heavy fall in price, given close to half the companies in the United States have price-to-earnings ratios (or "P/E's") above 18x, you may consider Franklin Wireless as a highly attractive investment with its 4.1x P/E ratio. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

Recent times have been advantageous for Franklin Wireless as its earnings have been rising faster than most other companies. 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 Franklin Wireless

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

How Is Franklin Wireless' Growth Trending?

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

If we review the last year of earnings growth, the company posted a terrific increase of 197%. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Turning to the outlook, the next year should bring diminished returns, with earnings decreasing 66% as estimated by the sole analyst watching the company. That's not great when the rest of the market is expected to grow by 12%.

In light of this, it's understandable that Franklin Wireless' P/E would sit below the majority of other companies. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Final Word

Having almost fallen off a cliff, Franklin Wireless' share price has pulled its P/E way down as well. 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.

As we suspected, our examination of Franklin Wireless' analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

There are also other vital risk factors to consider and we've discovered 3 warning signs for Franklin Wireless (1 is potentially serious!) that you should be aware of before investing here.

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

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.