Hanwha Systems Co., Ltd.'s (KRX:272210) 27% Share Price Plunge Could Signal Some Risk

Hanwha Systems Co., Ltd. (KRX:272210) shareholders won't be pleased to see that the share price has had a very rough month, dropping 27% and undoing the prior period's positive performance. Still, a bad month hasn't completely ruined the past year with the stock gaining 100%, which is great even in a bull market.

Although its price has dipped substantially, there still wouldn't be many who think Hanwha Systems' price-to-earnings (or "P/E") ratio of 14.4x is worth a mention when the median P/E in Korea is similar at about 13x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

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Hanwha Systems certainly has been doing a good job lately as it's been growing earnings more than most other companies. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

See our latest analysis for Hanwha Systems

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

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

Hanwha Systems' P/E ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the market.

If we review the last year of earnings growth, the company posted a terrific increase of 222%. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 13% per year as estimated by the analysts watching the company. Meanwhile, the broader market is forecast to expand by 19% per year, which paints a poor picture.

With this information, we find it concerning that Hanwha Systems is trading at a fairly similar P/E to the market. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the negative growth outlook.

The Key Takeaway

With its share price falling into a hole, the P/E for Hanwha Systems looks quite average now. 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.

We've established that Hanwha Systems currently trades on a higher than expected P/E for a company whose earnings are forecast to decline. Right now we are uncomfortable with the P/E as the predicted future earnings are unlikely to support a more positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Hanwha Systems that you should be aware of.

Of course, you might also be able to find a better stock than Hanwha Systems. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.