Komelon Corporation (KOSDAQ:049430) Held Back By Insufficient Growth Even After Shares Climb 27%

Komelon Corporation (KOSDAQ:049430) shareholders would be excited to see that the share price has had a great month, posting a 27% gain and recovering from prior weakness. Looking back a bit further, it's encouraging to see the stock is up 36% in the last year.

In spite of the firm bounce in price, Komelon may still be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 4.5x, since almost half of all companies in Korea have P/E ratios greater than 14x and even P/E's higher than 29x 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.

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The earnings growth achieved at Komelon over the last year would be more than acceptable for most companies. It might be that many expect the respectable earnings performance to degrade substantially, which has repressed the P/E. 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 Komelon

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

What Are Growth Metrics Telling Us About The Low P/E?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 23% last year. EPS has also lifted 25% in aggregate from three years ago, mostly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 36% shows it's noticeably less attractive on an annualised basis.

In light of this, it's understandable that Komelon's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.

The Bottom Line On Komelon's P/E

Shares in Komelon are going to need a lot more upward momentum to get the company's P/E out of its slump. 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.

As we suspected, our examination of Komelon revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.

Before you take the next step, you should know about the 1 warning sign for Komelon that we have uncovered.

Of course, you might also be able to find a better stock than Komelon. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.