Investors Aren't Buying Hyundai Engineering & Construction Co.,Ltd.'s (KRX:000720) Earnings

Hyundai Engineering & Construction Co.,Ltd.'s (KRX:000720) price-to-earnings (or "P/E") ratio of 6.7x might make it look like a buy right now compared to the market in Korea, where around half of the companies have P/E ratios above 12x and even P/E's above 24x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Recent times have been pleasing for Hyundai Engineering & ConstructionLtd as its earnings have risen in spite of the market's earnings going into reverse. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. 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 Hyundai Engineering & ConstructionLtd

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How Is Hyundai Engineering & ConstructionLtd's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as low as Hyundai Engineering & ConstructionLtd's is when the company's growth is on track to lag the market.

Retrospectively, the last year delivered an exceptional 61% gain to the company's bottom line. The latest three year period has also seen an excellent 334% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 5.6% per annum as estimated by the analysts watching the company. With the market predicted to deliver 19% growth per year, the company is positioned for a weaker earnings result.

With this information, we can see why Hyundai Engineering & ConstructionLtd is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

What We Can Learn From Hyundai Engineering & ConstructionLtd's P/E?

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 Hyundai Engineering & ConstructionLtd maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Hyundai Engineering & ConstructionLtd (at least 1 which is potentially serious), and understanding these should be part of your investment process.

Of course, you might also be able to find a better stock than Hyundai Engineering & ConstructionLtd. 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.