KANGWON ENERGY Co., Ltd. (KOSDAQ:114190) May Have Run Too Fast Too Soon With Recent 25% Price Plummet

KANGWON ENERGY Co., Ltd. (KOSDAQ:114190) shareholders that were waiting for something to happen have been dealt a blow with a 25% share price drop in the last month. For any long-term shareholders, the last month ends a year to forget by locking in a 66% share price decline.

In spite of the heavy fall in price, KANGWON ENERGY may still be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 29.2x, since almost half of all companies in Korea have P/E ratios under 11x 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.

Earnings have risen firmly for KANGWON ENERGY recently, which is pleasing to see. One possibility is that the P/E is high because investors think this respectable earnings growth will be enough to outperform the broader market in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.

View our latest analysis for KANGWON ENERGY

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

How Is KANGWON ENERGY's Growth Trending?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 30% last year. However, this wasn't enough as the latest three year period has seen a very unpleasant 8.6% drop in EPS in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 23% shows it's an unpleasant look.

With this information, we find it concerning that KANGWON ENERGY is trading at a P/E higher than the market. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

The Key Takeaway

KANGWON ENERGY's shares may have retreated, but its P/E is still flying high. 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.

Our examination of KANGWON ENERGY revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

You need to take note of risks, for example - KANGWON ENERGY has 3 warning signs (and 1 which can't be ignored) we think you should know about.

Of course, you might also be able to find a better stock than KANGWON ENERGY. 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.