There's No Escaping Nortech Systems Incorporated's (NASDAQ:NSYS) Muted Earnings Despite A 27% Share Price Rise

Nortech Systems Incorporated (NASDAQ:NSYS) shares have continued their recent momentum with a 27% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 73%.

Even after such a large jump in price, given about half the companies in the United States have price-to-earnings ratios (or "P/E's") above 17x, you may still consider Nortech Systems as a highly attractive investment with its 6.9x 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 limited.

With earnings growth that's exceedingly strong of late, Nortech Systems has been doing very well. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. 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.

See our latest analysis for Nortech Systems

Although there are no analyst estimates available for Nortech Systems, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Nortech Systems' Growth Trending?

The only time you'd be truly comfortable seeing a P/E as depressed as Nortech Systems' is when the company's growth is on track to lag the market decidedly.

If we review the last year of earnings growth, the company posted a terrific increase of 237%. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

This is in contrast to the rest of the market, which is expected to grow by 12% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we can see why Nortech Systems is trading at a P/E lower than the market. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

What We Can Learn From Nortech Systems' P/E?

Shares in Nortech Systems are going to need a lot more upward momentum to get the company's P/E out of its slump. 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 Nortech Systems revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 2 warning signs for Nortech Systems you should be aware of.

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

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

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.