Kyung Dong Navien Co., Ltd.'s (KRX:009450) 35% Share Price Surge Not Quite Adding Up

Kyung Dong Navien Co., Ltd. (KRX:009450) shares have continued their recent momentum with a 35% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 41%.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about Kyung Dong Navien's P/E ratio of 12.6x, since the median price-to-earnings (or "P/E") ratio in Korea is also close to 12x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

Kyung Dong Navien has been doing a good job lately as it's been growing earnings at a solid pace. One possibility is that the P/E is moderate because investors think this respectable earnings growth might not be enough to outperform the broader market in the near future. If that doesn't eventuate, then existing shareholders probably aren't too pessimistic about the future direction of the share price.

See our latest analysis for Kyung Dong Navien

Although there are no analyst estimates available for Kyung Dong Navien, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Kyung Dong Navien's Growth Trending?

The only time you'd be comfortable seeing a P/E like Kyung Dong Navien's is when the company's growth is tracking the market closely.

If we review the last year of earnings growth, the company posted a terrific increase of 28%. The strong recent performance means it was also able to grow EPS by 32% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 31% shows it's noticeably less attractive on an annualised basis.

In light of this, it's curious that Kyung Dong Navien's P/E sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as a continuation of recent earnings trends is likely to weigh down the shares eventually.

The Key Takeaway

Kyung Dong Navien appears to be back in favour with a solid price jump getting its P/E back in line with most other companies. 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.

Our examination of Kyung Dong Navien revealed its three-year earnings trends aren't impacting its P/E as much as we would have predicted, given they look worse than current market expectations. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

The company's balance sheet is another key area for risk analysis. You can assess many of the main risks through our free balance sheet analysis for Kyung Dong Navien with six simple checks.

Of course, you might also be able to find a better stock than Kyung Dong Navien. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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.