Getting In Cheap On HD Korea Shipbuilding & Offshore Engineering Co., Ltd. (KRX:009540) Might Be Difficult

With a price-to-earnings (or "P/E") ratio of 18.7x HD Korea Shipbuilding & Offshore Engineering Co., Ltd. (KRX:009540) may be sending bearish signals at the moment, given that almost half of all companies in Korea have P/E ratios under 15x and even P/E's lower than 8x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

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Recent times have been pleasing for HD Korea Shipbuilding & Offshore Engineering as its earnings have risen in spite of the market's earnings going into reverse. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for HD Korea Shipbuilding & Offshore Engineering

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Is There Enough Growth For HD Korea Shipbuilding & Offshore Engineering?

The only time you'd be truly comfortable seeing a P/E as high as HD Korea Shipbuilding & Offshore Engineering's is when the company's growth is on track to outshine the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 95% last year. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 31% per annum during the coming three years according to the analysts following the company. That's shaping up to be materially higher than the 18% per annum growth forecast for the broader market.

With this information, we can see why HD Korea Shipbuilding & Offshore Engineering is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

As we suspected, our examination of HD Korea Shipbuilding & Offshore Engineering's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for HD Korea Shipbuilding & Offshore Engineering with six simple checks on some of these key factors.

You might be able to find a better investment than HD Korea Shipbuilding & Offshore Engineering. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.