Aehr Test Systems, Inc. (NASDAQ:AEHR) shareholders won't be pleased to see that the share price has had a very rough month, dropping 34% and undoing the prior period's positive performance. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 28% in that time.

Although its price has dipped substantially, Aehr Test Systems may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 14.9x, since almost half of all companies in the United States have P/E ratios greater than 19x and even P/E's higher than 35x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

It looks like earnings growth has deserted Aehr Test Systems recently, which is not something to boast about. One possibility is that the P/E is low because investors think this benign earnings growth rate will likely underperform the broader market in the near future. If not, then existing shareholders may be feeling optimistic about the future direction of the share price.

Check out our latest analysis for Aehr Test Systems

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

Does Growth Match The Low P/E?

Aehr Test Systems' P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

If we review the last year of earnings, the company posted a result that saw barely any deviation from a year ago. However, a few strong years before that means that it was still able to grow EPS by an impressive 1,350% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Comparing that to the market, which is only predicted to deliver 15% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised earnings results.

With this information, we find it odd that Aehr Test Systems is trading at a P/E lower than the market. It looks like most investors are not convinced the company can maintain its recent growth rates.

The Key Takeaway

The softening of Aehr Test Systems' shares means its P/E is now sitting at a pretty low level. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

Our examination of Aehr Test Systems revealed its three-year earnings trends aren't contributing to its P/E anywhere near as much as we would have predicted, given they look better than current market expectations. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this positive performance. It appears many are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Aehr Test Systems (at least 1 which is potentially serious), and understanding these should be part of your investment process.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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