Investors Appear Satisfied With Hyundai Rotem Company's (KRX:064350) Prospects As Shares Rocket 31%

Hyundai Rotem Company (KRX:064350) shares have continued their recent momentum with a 31% gain in the last month alone. The last month tops off a massive increase of 213% in the last year.

Following the firm bounce in price, Hyundai Rotem may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 31.7x, since almost half of all companies in Korea have P/E ratios under 11x and even P/E's lower than 6x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

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Recent times have been advantageous for Hyundai Rotem 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.

View our latest analysis for Hyundai Rotem

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

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

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

Retrospectively, the last year delivered an exceptional 153% gain to the company's bottom line. The latest three year period has also seen an excellent 512% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 32% per year over the next three years. That's shaping up to be materially higher than the 18% each year growth forecast for the broader market.

With this information, we can see why Hyundai Rotem is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What We Can Learn From Hyundai Rotem's P/E?

Hyundai Rotem's P/E is flying high just like its stock has during the last month. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Hyundai Rotem maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

Before you settle on your opinion, we've discovered 2 warning signs for Hyundai Rotem (1 is significant!) that you should be aware of.

Of course, you might also be able to find a better stock than Hyundai Rotem. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.