Retech Technology Co., Limited’s (ASX:RTE) price-to-earnings (or “P/E”) ratio of 7.5x might make it look like a strong buy right now compared to the market in Australia, where around half of the companies have P/E ratios above 16x and even P/E’s above 30x are quite common. However, the P/E might be quite low for a reason and it requires further investigation to determine if it’s justified.
With earnings growth that’s superior to most other companies of late, Retech Technology has been doing relatively well. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
Does Retech Technology Have A Relatively High Or Low P/E For Its Industry?
We’d like to see if P/E’s within Retech Technology’s industry might provide some colour around the company’s particularly low P/E ratio. You’ll notice in the figure below that P/E ratios in the Consumer Services industry are similar to the market. So we’d say there is little merit in the premise that the company’s ratio being shaped by its industry at this time. Ordinarily, the majority of companies’ P/E’s would be supported by the general conditions within the Consumer Services industry. Nevertheless, the company’s P/E should be primarily influenced by its own financial performance.
Keen to find out how analysts think Retech Technology’s future stacks up against the industry? In that case, our free report is a great place to start.
Does Growth Match The Low P/E?
There’s an inherent assumption that a company should far underperform the market for P/E ratios like Retech Technology’s to be considered reasonable.
If we review the last year of earnings growth, the company posted a worthy increase of 8.7%. Still, lamentably EPS has fallen 31% in aggregate from three years ago, which is disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.
Looking ahead now, EPS is anticipated to climb by 31% per year during the coming three years according to the sole analyst following the company. Meanwhile, the rest of the market is forecast to only expand by 12% per year, which is noticeably less attractive.
With this information, we find it odd that Retech Technology is trading at a P/E lower than the market. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.
The Final Word
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.
We’ve established that Retech Technology currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. It appears many are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.
Having said that, be aware Retech Technology is showing 2 warning signs in our investment analysis, and 1 of those is significant.
You might be able to find a better investment than Retech Technology. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).
This article by Simply Wall St is general in nature. 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.