Improved Earnings Required Before Korea Fuel-Tech Corporation (KOSDAQ:123410) Stock's 27% Jump Looks Justified

Korea Fuel-Tech Corporation (KOSDAQ:123410) shareholders would be excited to see that the share price has had a great month, posting a 27% gain and recovering from prior weakness. The last 30 days bring the annual gain to a very sharp 56%.

In spite of the firm bounce in price, Korea Fuel-Tech's price-to-earnings (or "P/E") ratio of 4.6x might still make it look like a strong buy right now compared to the market in Korea, where around half of the companies have P/E ratios above 14x and even P/E's above 30x are quite common. 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.

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Korea Fuel-Tech certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for Korea Fuel-Tech

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How Is Korea Fuel-Tech's Growth Trending?

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

Retrospectively, the last year delivered an exceptional 38% gain to the company's bottom line. The latest three year period has also seen an excellent 578% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next year should generate growth of 13% as estimated by the two analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 36%, which is noticeably more attractive.

In light of this, it's understandable that Korea Fuel-Tech's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Final Word

Even after such a strong price move, Korea Fuel-Tech's P/E still trails the rest of the market significantly. 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.

As we suspected, our examination of Korea Fuel-Tech's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. 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.

Before you take the next step, you should know about the 1 warning sign for Korea Fuel-Tech that we have uncovered.

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

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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.