Investor Optimism Abounds Korea Aerospace Industries, Ltd. (KRX:047810) But Growth Is Lacking

When close to half the companies in Korea have price-to-earnings ratios (or "P/E's") below 12x, you may consider Korea Aerospace Industries, Ltd. (KRX:047810) as a stock to avoid entirely with its 20.7x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Recent times have been pleasing for Korea Aerospace Industries 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. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Korea Aerospace Industries

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How Is Korea Aerospace Industries' Growth Trending?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Korea Aerospace Industries' to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 106% last year. Pleasingly, EPS has also lifted 2,902% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 13% each year during the coming three years according to the analysts following the company. That's shaping up to be materially lower than the 20% per annum growth forecast for the broader market.

In light of this, it's alarming that Korea Aerospace Industries' 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 Korea Aerospace Industries' P/E?

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 Korea Aerospace Industries currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

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

You might be able to find a better investment than Korea Aerospace Industries. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com