Market Still Lacking Some Conviction On Kumho Industrial Co., Ltd. (KRX:002990)

With a price-to-earnings (or "P/E") ratio of 13x Kumho Industrial Co., Ltd. (KRX:002990) may be sending bullish signals at the moment, given that almost half of all companies in Korea have P/E ratios greater than 21x and even P/E's higher than 47x 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 limited.

Kumho Industrial certainly has been doing a good job lately as it's been growing earnings more than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

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How Is Kumho Industrial's Growth Trending?

Kumho Industrial's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 115% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 72% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the twin analysts covering the company suggest earnings should grow by 66% each year over the next three years. That's shaping up to be materially higher than the 27% per annum growth forecast for the broader market.

In light of this, it's peculiar that Kumho Industrial's P/E sits below the majority of other companies. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

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 Kumho Industrial currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.

Before you take the next step, you should know about the 3 warning signs for Kumho Industrial that we have uncovered.

If these risks are making you reconsider your opinion on Kumho Industrial, explore our interactive list of high quality stocks to get an idea of what else is out there.

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This article by Simply Wall St is general in nature. 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.
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