Tae Kwang Corporation (KOSDAQ:023160) Stock Rockets 28% As Investors Are Less Pessimistic Than Expected

Despite an already strong run, Tae Kwang Corporation (KOSDAQ:023160) shares have been powering on, with a gain of 28% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 80% in the last year.

Following the firm bounce in price, Tae Kwang's price-to-earnings (or "P/E") ratio of 14.5x might make it look like a sell right now compared to the market in Korea, where around half of the companies have P/E ratios below 11x and even P/E's below 6x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Tae Kwang hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

See our latest analysis for Tae Kwang

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Does Growth Match The High P/E?

There's an inherent assumption that a company should outperform 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. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Shifting to the future, estimates from the five analysts covering the company suggest earnings should grow by 26% over the next year. Meanwhile, the rest of the market is forecast to expand by 33%, which is noticeably more attractive.

With this information, we find it concerning that Tae Kwang is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Final Word

The large bounce in Tae Kwang's shares has lifted the company's P/E to a fairly high level. 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 Tae Kwang currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for Tae Kwang with six simple checks will allow you to discover any risks that could be an issue.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.