Dongwon Metal Co., Ltd. (KRX:018500) Looks Inexpensive But Perhaps Not Attractive Enough

Dongwon Metal Co., Ltd.'s (KRX:018500) price-to-earnings (or "P/E") ratio of 3.6x 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 35x 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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Dongwon Metal has been doing a decent job lately as it's been growing earnings at a reasonable pace. One possibility is that the P/E is low because investors think this good earnings growth might actually underperform the broader market in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Check out our latest analysis for Dongwon Metal

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Dongwon Metal will help you shine a light on its historical performance.

Does Growth Match The Low P/E?

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

Retrospectively, the last year delivered a decent 6.7% gain to the company's bottom line. EPS has also lifted 13% 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 respectable for the company.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 33% shows it's noticeably less attractive on an annualised basis.

In light of this, it's understandable that Dongwon Metal's P/E sits below the majority of other companies. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

What We Can Learn From Dongwon Metal's P/E?

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.

As we suspected, our examination of Dongwon Metal revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Dongwon Metal that you should be aware of.

You might be able to find a better investment than Dongwon Metal. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.