Subdued Growth No Barrier To Samsung Electro-Mechanics Co., Ltd.'s (KRX:009150) Price

It's not a stretch to say that Samsung Electro-Mechanics Co., Ltd.'s (KRX:009150) price-to-earnings (or "P/E") ratio of 18.2x right now seems quite "middle-of-the-road" compared to the market in Korea, where the median P/E ratio is around 17x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

Samsung Electro-Mechanics hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It might be that many expect the dour earnings performance to strengthen positively, which has kept the P/E from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.

Check out our latest analysis for Samsung Electro-Mechanics

Does Samsung Electro-Mechanics Have A Relatively High Or Low P/E For Its Industry?

We'd like to see if P/E's within Samsung Electro-Mechanics' industry might provide some colour around the company's fairly average P/E ratio. You'll notice in the figure below that P/E ratios in the Electronic industry are higher than 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. Some industry P/E's don't move around a lot and right now most companies within the Electronic industry should be getting a boost. Whilst this can be a heavy component, industry factors are normally secondary to company financials and earnings.

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Is There Some Growth For Samsung Electro-Mechanics?

In order to justify its P/E ratio, Samsung Electro-Mechanics would need to produce growth that's similar to the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 37%. This has erased any of its gains during the last three years, with practically no change in EPS being achieved in total. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Turning to the outlook, the next three years should generate growth of 11% per annum as estimated by the analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 23% per annum, which is noticeably more attractive.

With this information, we find it interesting that Samsung Electro-Mechanics is trading at a fairly similar P/E to the market. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Final Word

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.

Our examination of Samsung Electro-Mechanics' analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Before you take the next step, you should know about the 3 warning signs for Samsung Electro-Mechanics that we have uncovered.

If P/E ratios interest you, you may wish to see this free collection of other companies that have grown earnings strongly and trade on P/E's below 20x.

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