Market Participants Recognise Hyundai Rotem Company's (KRX:064350) Earnings Pushing Shares 58% Higher

Hyundai Rotem Company (KRX:064350) shareholders would be excited to see that the share price has had a great month, posting a 58% gain and recovering from prior weakness. The last month tops off a massive increase of 177% 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 24.4x, since almost half of all companies in Korea have P/E ratios under 12x and even P/E's lower than 6x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

Hyundai Rotem certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for Hyundai Rotem

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How Is Hyundai Rotem's Growth Trending?

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

Retrospectively, the last year delivered an exceptional 153% gain to the company's bottom line. Pleasingly, EPS has also lifted 512% 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.

Looking ahead now, EPS is anticipated to climb by 37% per annum during the coming three years according to the analysts following the company. That's shaping up to be materially higher than the 17% per annum 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. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

The strong share price surge has got Hyundai Rotem's P/E rushing to great heights as well. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

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. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

You always need to take note of risks, for example - Hyundai Rotem has 1 warning sign we think you should be aware of.

You might be able to find a better investment than Hyundai Rotem. 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.