Englewood Lab, Inc.'s (KOSDAQ:950140) 26% Price Boost Is Out Of Tune With Earnings

Englewood Lab, Inc. (KOSDAQ:950140) shares have continued their recent momentum with a 26% gain in the last month alone. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 36% over that time.

Since its price has surged higher, given around half the companies in Korea have price-to-earnings ratios (or "P/E's") below 13x, you may consider Englewood Lab as a stock to potentially avoid with its 16.2x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

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As an illustration, earnings have deteriorated at Englewood Lab over the last year, which is not ideal at all. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Englewood Lab

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How Is Englewood Lab's Growth Trending?

There's an inherent assumption that a company should outperform the market for P/E ratios like Englewood Lab's to be considered reasonable.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 28%. That put a dampener on the good run it was having over the longer-term as its three-year EPS growth is still a noteworthy 17% in total. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been mostly respectable for the company.

This is in contrast to the rest of the market, which is expected to grow by 29% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it concerning that Englewood Lab is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Bottom Line On Englewood Lab's P/E

Englewood Lab's P/E is getting right up there since its shares have risen strongly. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Englewood Lab currently trades on a much higher than expected P/E since its recent three-year growth is lower than the wider market forecast. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Before you take the next step, you should know about the 1 warning sign for Englewood Lab that we have uncovered.

Of course, you might also be able to find a better stock than Englewood Lab. 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.