Why Investors Shouldn't Be Surprised By Sejin Heavy Industries Co., Ltd.'s (KRX:075580) 29% Share Price Surge

Sejin Heavy Industries Co., Ltd. (KRX:075580) shares have had a really impressive month, gaining 29% after a shaky period beforehand. The last 30 days bring the annual gain to a very sharp 87%.

After such a large jump in price, Sejin Heavy Industries' price-to-earnings (or "P/E") ratio of 31.9x might make it look like a strong 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. 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.

Recent times have been advantageous for Sejin Heavy Industries 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 Sejin Heavy Industries

Keen to find out how analysts think Sejin Heavy Industries' future stacks up against the industry? In that case, our free report is a great place to start.

Does Growth Match The High P/E?

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

Retrospectively, the last year delivered an exceptional 230% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen a very unpleasant 42% drop in EPS in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the dual analysts covering the company suggest earnings should grow by 90% over the next year. Meanwhile, the rest of the market is forecast to only expand by 34%, which is noticeably less attractive.

With this information, we can see why Sejin Heavy Industries 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.

The Final Word

Shares in Sejin Heavy Industries have built up some good momentum lately, which has really inflated its P/E. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of Sejin Heavy Industries' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. 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.

It is also worth noting that we have found 2 warning signs for Sejin Heavy Industries (1 is significant!) that you need to take into consideration.

If these risks are making you reconsider your opinion on Sejin Heavy Industries, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.