Optimistic Investors Push Tae Kwang Corporation (KOSDAQ:023160) Shares Up 28% But Growth Is Lacking

Tae Kwang Corporation (KOSDAQ:023160) shareholders would be excited to see that the share price has had a great month, posting a 28% gain and recovering from prior weakness. Unfortunately, despite the strong performance over the last month, the full year gain of 9.1% isn't as attractive.

In spite of the firm bounce in price, you could still be forgiven for feeling indifferent about Tae Kwang's P/E ratio of 10.6x, since the median price-to-earnings (or "P/E") ratio in Korea is also close to 11x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

While the market has experienced earnings growth lately, Tae Kwang's earnings have gone into reverse gear, which is not great. One possibility is that the P/E is moderate because investors think this poor earnings performance will turn around. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

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Does Growth Match The P/E?

There's an inherent assumption that a company should be matching the market for P/E ratios like Tae Kwang's to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 27%. Still, the latest three year period has seen an excellent 774% overall rise in EPS, in spite of its unsatisfying short-term performance. 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.

Looking ahead now, EPS is anticipated to climb by 29% during the coming year according to the four analysts following the company. With the market predicted to deliver 34% growth , the company is positioned for a weaker earnings result.

In light of this, it's curious that Tae Kwang's P/E sits in line with the majority of other companies. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

What We Can Learn From Tae Kwang's P/E?

Tae Kwang appears to be back in favour with a solid price jump getting its P/E back in line with most other companies. 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.

Our examination of Tae Kwang's analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E as much as we would have predicted. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for Tae Kwang with six simple checks on some of these key factors.

You might be able to find a better investment than Tae Kwang. 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.