More Unpleasant Surprises Could Be In Store For LIG Nex1 Co., Ltd.'s (KRX:079550) Shares After Tumbling 25%

LIG Nex1 Co., Ltd. (KRX:079550) shareholders that were waiting for something to happen have been dealt a blow with a 25% share price drop in the last month. Looking at the bigger picture, even after this poor month the stock is up 94% in the last year.

Even after such a large drop in price, LIG Nex1 may still be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 26x, since almost half of all companies in Korea have P/E ratios under 13x and even P/E's lower than 7x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

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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.

See our latest analysis for LIG Nex1

If you'd like to see what analysts are forecasting going forward, you should check out our free report on LIG Nex1.

Is There Enough Growth For LIG Nex1?

LIG Nex1's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

Retrospectively, the last year delivered an exceptional 61% gain to the company's bottom line. The latest three year period has also seen an excellent 75% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 18% each year during the coming three years according to the analysts following the company. Meanwhile, the rest of the market is forecast to expand by 19% each year, which is not materially different.

With this information, we find it interesting that LIG Nex1 is trading at a high P/E compared to the market. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

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

A significant share price dive has done very little to deflate LIG Nex1's very lofty P/E. 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 currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

Before you settle on your opinion, we've discovered 3 warning signs for LIG Nex1 (2 shouldn't be ignored!) that you should be aware of.

You might be able to find a better investment than LIG Nex1. 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.