Sambu Engineering & Construction Co., Ltd's (KRX:001470) Shares May Have Run Too Fast Too Soon

With a price-to-earnings (or "P/E") ratio of 71x Sambu Engineering & Construction Co., Ltd (KRX:001470) may be sending very bearish signals at the moment, given that almost half of all companies in Korea have P/E ratios under 18x and even P/E's lower than 10x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Recent times have been quite advantageous for Sambu Engineering & Construction as its earnings have been rising very briskly. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Sambu Engineering & Construction

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Sambu Engineering & Construction's earnings, revenue and cash flow.

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 Sambu Engineering & Construction's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 38% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 96% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

In contrast to the company, the rest of the market is expected to grow by 42% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

In light of this, it's alarming that Sambu Engineering & Construction's P/E sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Key Takeaway

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Sambu Engineering & Construction currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. 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. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Before you take the next step, you should know about the 3 warning signs for Sambu Engineering & Construction (2 are potentially serious!) that we have uncovered.

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