Taewoong Co.,Ltd's (KOSDAQ:044490) P/E Is Still On The Mark Following 42% Share Price Bounce

Taewoong Co.,Ltd (KOSDAQ:044490) shares have continued their recent momentum with a 42% gain in the last month alone. Taking a wider view, although not as strong as the last month, the full year gain of 15% is also fairly reasonable.

Since its price has surged higher, TaewoongLtd may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 22.7x, since almost half of all companies in Korea have P/E ratios under 12x and even P/E's lower than 6x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

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For instance, TaewoongLtd's receding earnings in recent times would have to be some food for thought. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.

View our latest analysis for TaewoongLtd

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Does Growth Match The High P/E?

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

Retrospectively, the last year delivered a frustrating 28% decrease to the company's bottom line. Still, the latest three year period has seen an excellent 782% 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.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 22% shows it's noticeably more attractive on an annualised basis.

In light of this, it's understandable that TaewoongLtd's P/E sits above the majority of other companies. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the bourse.

The Key Takeaway

Shares in TaewoongLtd have built up some good momentum lately, which has really inflated its P/E. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that TaewoongLtd maintains its high P/E on the strength of its recent three-year growth being higher than the wider market forecast, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price falling strongly in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 2 warning signs for TaewoongLtd you should be aware of.

If you're unsure about the strength of TaewoongLtd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.