After Leaping 30% LIG Nex1 Co., Ltd. (KRX:079550) Shares Are Not Flying Under The Radar

LIG Nex1 Co., Ltd. (KRX:079550) shareholders would be excited to see that the share price has had a great month, posting a 30% gain and recovering from prior weakness. The last month tops off a massive increase of 128% in the last year.

Since its price has surged higher, given close to half the companies in Korea have price-to-earnings ratios (or "P/E's") below 11x, you may consider LIG Nex1 as a stock to avoid entirely with its 31.8x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Recent times have been advantageous for LIG Nex1 as its earnings have been rising faster than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for LIG Nex1

Keen to find out how analysts think LIG Nex1's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Enough Growth For LIG Nex1?

In order to justify its P/E ratio, LIG Nex1 would need to produce outstanding growth well in excess of the market.

If we review the last year of earnings growth, the company posted a terrific increase of 129%. The latest three year period has also seen an excellent 110% 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 27% per annum over the next three years. That's shaping up to be materially higher than the 16% per annum growth forecast for the broader market.

In light of this, it's understandable that LIG Nex1's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From LIG Nex1's P/E?

LIG Nex1's P/E is flying high just like its stock has during the last month. 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 LIG Nex1 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.

It is also worth noting that we have found 1 warning sign for LIG Nex1 that you need to take into consideration.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on 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.