Earnings Working Against Hankook Tire & Technology Co., Ltd.'s (KRX:161390) Share Price

With a price-to-earnings (or "P/E") ratio of 3.8x Hankook Tire & Technology Co., Ltd. (KRX:161390) may be sending very bullish signals at the moment, given that almost half of all companies in Korea have P/E ratios greater than 12x and even P/E's higher than 24x are not unusual. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

Hankook Tire & Technology certainly has been doing a good job lately as it's been growing earnings more than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. 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.

View our latest analysis for Hankook Tire & Technology

Keen to find out how analysts think Hankook Tire & Technology's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Hankook Tire & Technology's Growth Trending?

In order to justify its P/E ratio, Hankook Tire & Technology would need to produce anemic growth that's substantially trailing the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 121% last year. The strong recent performance means it was also able to grow EPS by 89% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to slump, contracting by 2.0% during the coming year according to the analysts following the company. That's not great when the rest of the market is expected to grow by 34%.

With this information, we are not surprised that Hankook Tire & Technology is trading at a P/E lower than the market. 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 Bottom Line On Hankook Tire & Technology's P/E

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Hankook Tire & Technology's analyst forecasts revealed that its outlook for shrinking earnings 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. It's hard to see the share price rising strongly in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 1 warning sign for Hankook Tire & Technology you should be aware of.

If these risks are making you reconsider your opinion on Hankook Tire & Technology, 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.