Despite an already strong run, S&W Corporation (KOSDAQ:103230) 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 31% in the last year.
Although its price has surged higher, S&W may still be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 6x, since almost half of all companies in Korea have P/E ratios greater than 16x and even P/E's higher than 35x 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.
Recent times have been quite advantageous for S&W as its earnings have been rising very briskly. It might be that many expect the strong 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.
Check out our latest analysis for S&W
Does Growth Match The Low P/E?
The only time you'd be truly comfortable seeing a P/E as depressed as S&W's is when the company's growth is on track to lag the market decidedly.
Retrospectively, the last year delivered an exceptional 87% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 1,790% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.
Comparing that to the market, which is only predicted to deliver 33% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised earnings results.
In light of this, it's peculiar that S&W's P/E sits below the majority of other companies. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.
The Final Word
Even after such a strong price move, S&W's P/E still trails the rest of the market significantly. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.
We've established that S&W currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this positive performance. It appears many are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.
Before you take the next step, you should know about the 3 warning signs for S&W (1 is a bit concerning!) that we have uncovered.
If these risks are making you reconsider your opinion on S&W, explore our interactive list of high quality stocks to get an idea of what else is out there.
Valuation is complex, but we're here to simplify it.
Discover if S&W might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.
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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.