GAON CABLE Co., Ltd. (KRX:000500) Stock Rockets 46% As Investors Are Less Pessimistic Than Expected

GAON CABLE Co., Ltd. (KRX:000500) shares have had a really impressive month, gaining 46% after a shaky period beforehand. The last 30 days bring the annual gain to a very sharp 25%.

Following the firm bounce in price, GAON CABLE's price-to-earnings (or "P/E") ratio of 39.3x might make it look like a strong 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. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

We've discovered 2 warning signs about GAON CABLE. View them for free.

GAON CABLE certainly has been doing a good job lately as it's been growing earnings more than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for GAON CABLE

If you'd like to see what analysts are forecasting going forward, you should check out our free report on GAON CABLE.

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

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

Taking a look back first, we see that the company managed to grow earnings per share by a handy 12% last year. However, due to its less than impressive performance prior to this period, EPS growth is practically non-existent over the last three years overall. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Turning to the outlook, the next year should generate growth of 2.5% as estimated by the one analyst watching the company. With the market predicted to deliver 21% growth , the company is positioned for a weaker earnings result.

In light of this, it's alarming that GAON CABLE's P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

The Final Word

GAON CABLE's P/E is flying high just like its stock has during the last month. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that GAON CABLE 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. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Having said that, be aware GAON CABLE is showing 2 warning signs in our investment analysis, and 1 of those is concerning.

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.