Hyundai Corporation's (KRX:011760) Prospects Need A Boost To Lift Shares

Hyundai Corporation's (KRX:011760) price-to-earnings (or "P/E") ratio of 4.9x might make it look like a strong buy right now compared to the market in Korea, where around half of the companies have P/E ratios above 21x and even P/E's above 46x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.

With earnings growth that's superior to most other companies of late, Hyundai has been doing relatively well. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

View our latest analysis for Hyundai

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Hyundai.

What Are Growth Metrics Telling Us About The Low P/E?

The only time you'd be truly comfortable seeing a P/E as depressed as Hyundai's is when the company's growth is on track to lag the market decidedly.

Taking a look back first, we see that the company grew earnings per share by an impressive 207% last year. The latest three year period has also seen an excellent 102% 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.

Shifting to the future, estimates from the dual analysts covering the company suggest earnings growth is heading into negative territory, declining 45% over the next year. With the market predicted to deliver 47% growth , that's a disappointing outcome.

In light of this, it's understandable that Hyundai's P/E would sit below the majority of other companies. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Key Takeaway

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 Hyundai maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Before you settle on your opinion, we've discovered 4 warning signs for Hyundai (2 are concerning!) that you should be aware of.

If these risks are making you reconsider your opinion on Hyundai, 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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