Insufficient Growth At Doosan Bobcat Inc. (KRX:241560) Hampers Share Price

Doosan Bobcat Inc.'s (KRX:241560) price-to-earnings (or "P/E") ratio of 5.7x might make it look like a strong buy right now compared to the market in Korea, where around half of the companies have P/E ratios above 13x and even P/E's above 26x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

Doosan Bobcat certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

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Does Growth Match The Low P/E?

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

If we review the last year of earnings growth, the company posted a terrific increase of 42%. The strong recent performance means it was also able to grow EPS by 211% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 0.3% each year during the coming three years according to the eight analysts following the company. That's shaping up to be materially lower than the 19% per year growth forecast for the broader market.

In light of this, it's understandable that Doosan Bobcat's P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Key Takeaway

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Doosan Bobcat's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

You need to take note of risks, for example - Doosan Bobcat has 2 warning signs (and 1 which can't be ignored) we think you should know about.

If you're unsure about the strength of Doosan Bobcat's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.