Why Investors Shouldn't Be Surprised By Hyundai Motor Company's (KRX:005380) Low P/E

Hyundai Motor Company's (KRX:005380) price-to-earnings (or "P/E") ratio of 5.5x might 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 15x and even P/E's above 36x 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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Recent times haven't been advantageous for Hyundai Motor as its earnings have been falling quicker than most other companies. The P/E is probably low because investors think this poor earnings performance isn't going to improve at all. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. If not, then existing shareholders will probably struggle to get excited about the future direction of the share price.

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Is There Any Growth For Hyundai Motor?

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

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 12%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 90% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 3.1% each year over the next three years. With the market predicted to deliver 19% growth each year, the company is positioned for a weaker earnings result.

With this information, we can see why Hyundai Motor is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Key Takeaway

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Hyundai Motor maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Hyundai Motor (1 can't be ignored) you should be aware of.

If these risks are making you reconsider your opinion on Hyundai Motor, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.