Hanwha Aerospace Co., Ltd.'s (KRX:012450) 32% Share Price Surge Not Quite Adding Up

Despite an already strong run, Hanwha Aerospace Co., Ltd. (KRX:012450) shares have been powering on, with a gain of 32% in the last thirty days. The last month tops off a massive increase of 219% in the last year.

Following the firm bounce in price, Hanwha Aerospace's price-to-earnings (or "P/E") ratio of 16.6x might make it look like a sell right now compared to the market in Korea, where around half of the companies have P/E ratios below 11x and even P/E's below 6x are quite common. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

We've discovered 3 warning signs about Hanwha Aerospace. View them for free.

Recent times have been advantageous for Hanwha Aerospace as its earnings have been rising faster than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Hanwha Aerospace

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Is There Enough Growth For Hanwha Aerospace?

Hanwha Aerospace's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

If we review the last year of earnings growth, the company posted a terrific increase of 185%. Pleasingly, EPS has also lifted 1,317% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 1.4% per annum as estimated by the analysts watching the company. That's shaping up to be materially lower than the 18% per annum growth forecast for the broader market.

In light of this, it's alarming that Hanwha Aerospace's P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

What We Can Learn From Hanwha Aerospace's P/E?

The large bounce in Hanwha Aerospace's shares has lifted the company's P/E to a fairly high level. 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 Hanwha Aerospace currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

It is also worth noting that we have found 3 warning signs for Hanwha Aerospace that you need to take into consideration.

If you're unsure about the strength of Hanwha Aerospace'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.