Investors Appear Satisfied With LIG Nex1 Co., Ltd.'s (KRX:079550) Prospects As Shares Rocket 29%

LIG Nex1 Co., Ltd. (KRX:079550) shares have had a really impressive month, gaining 29% after a shaky period beforehand. The last month tops off a massive increase of 143% in the last year.

After such a large jump in price, LIG Nex1's price-to-earnings (or "P/E") ratio of 20.5x might make it look like a sell right now compared to the market in Korea, where around half of the companies have P/E ratios below 14x and even P/E's below 6x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Recent times have been pleasing for LIG Nex1 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View 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.

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

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

If we review the last year of earnings growth, the company posted a terrific increase of 42%. Pleasingly, EPS has also lifted 201% 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.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 25% per annum over the next three years. Meanwhile, the rest of the market is forecast to only expand by 20% each year, which is noticeably less attractive.

With this information, we can see why LIG Nex1 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.

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

LIG Nex1 shares have received a push in the right direction, but its P/E is elevated too. 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 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.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for LIG Nex1 that you should be aware of.

If these risks are making you reconsider your opinion on LIG Nex1, 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.