Why We're Not Concerned Yet About Daewon Cable. Co., Ltd.'s (KRX:006340) 27% Share Price Plunge

Daewon Cable. Co., Ltd. (KRX:006340) shareholders won't be pleased to see that the share price has had a very rough month, dropping 27% and undoing the prior period's positive performance. Looking at the bigger picture, even after this poor month the stock is up 96% in the last year.

Even after such a large drop in price, Daewon Cable's price-to-earnings (or "P/E") ratio of 19.4x might still 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 10x 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.

With earnings growth that's exceedingly strong of late, Daewon Cable has been doing very well. 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. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Daewon Cable

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 Daewon Cable's earnings, revenue and cash flow.

How Is Daewon Cable's Growth Trending?

Daewon Cable's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

Retrospectively, the last year delivered an exceptional 95% gain to the company's bottom line. The latest three year period has also seen an excellent 263% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 33% shows it's noticeably more attractive on an annualised basis.

In light of this, it's understandable that Daewon Cable's P/E sits above the majority of other companies. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

The Bottom Line On Daewon Cable's P/E

Daewon Cable's shares may have retreated, but its P/E is still flying high. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Daewon Cable maintains its high P/E on the strength of its recent three-year growth being higher than the wider market forecast, as expected. Right now shareholders are comfortable with the P/E as they are quite confident earnings aren't under threat. If recent medium-term earnings trends continue, it's hard to see the share price falling strongly in the near future under these circumstances.

Before you take the next step, you should know about the 1 warning sign for Daewon Cable that we have uncovered.

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

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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.