Improved Earnings Required Before SK-Electronics CO.,LTD. (TSE:6677) Stock's 26% Jump Looks Justified

SK-Electronics CO.,LTD. (TSE:6677) shareholders would be excited to see that the share price has had a great month, posting a 26% gain and recovering from prior weakness. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 29% in the last twelve months.

Even after such a large jump in price, SK-ElectronicsLTD's price-to-earnings (or "P/E") ratio of 7.6x might still make it look like a buy right now compared to the market in Japan, where around half of the companies have P/E ratios above 13x and even P/E's above 21x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

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Recent earnings growth for SK-ElectronicsLTD has been in line with the market. One possibility is that the P/E is low because investors think this modest earnings performance may begin to slide. If not, then existing shareholders have reason to be optimistic about the future direction of the share price.

Check out our latest analysis for SK-ElectronicsLTD

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

What Are Growth Metrics Telling Us About The Low P/E?

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

Retrospectively, the last year delivered a decent 11% gain to the company's bottom line. Pleasingly, EPS has also lifted 203% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to slump, contracting by 13% per annum during the coming three years according to the two analysts following the company. With the market predicted to deliver 9.8% growth each year, that's a disappointing outcome.

In light of this, it's understandable that SK-ElectronicsLTD's P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Final Word

SK-ElectronicsLTD's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that SK-ElectronicsLTD maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

You should always think about risks. Case in point, we've spotted 3 warning signs for SK-ElectronicsLTD you should be aware of, and 1 of them is a bit unpleasant.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.