The Market Doesn't Like What It Sees From Daewoo Engineering & Construction Co., Ltd.'s (KRX:047040) Earnings Yet

When close to half the companies in Korea have price-to-earnings ratios (or "P/E's") above 12x, you may consider Daewoo Engineering & Construction Co., Ltd. (KRX:047040) as a highly attractive investment with its 4.1x P/E ratio. 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.

While the market has experienced earnings growth lately, Daewoo Engineering & Construction's earnings have gone into reverse gear, which is not great. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If you still 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.

See our latest analysis for Daewoo Engineering & Construction

Want the full picture on analyst estimates for the company? Then our free report on Daewoo Engineering & Construction will help you uncover what's on the horizon.

How Is Daewoo Engineering & Construction's Growth Trending?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Daewoo Engineering & Construction's to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 31%. As a result, earnings from three years ago have also fallen 13% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 8.1% per year as estimated by the analysts watching the company. That's shaping up to be materially lower than the 16% per year growth forecast for the broader market.

With this information, we can see why Daewoo Engineering & Construction is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

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.

As we suspected, our examination of Daewoo Engineering & Construction's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Daewoo Engineering & Construction, and understanding should be part of your investment process.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.