Sidiz.Inc.'s (KRX:134790) 28% Price Boost Is Out Of Tune With Earnings

Sidiz.Inc. (KRX:134790) shares have continued their recent momentum with a 28% gain in the last month alone. Unfortunately, despite the strong performance over the last month, the full year gain of 7.8% isn't as attractive.

After such a large jump in price, Sidiz.Inc's price-to-earnings (or "P/E") ratio of 58.8x might make it look like a strong sell right now compared to the market in Korea, where around half of the companies have P/E ratios below 11x 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 highly elevated P/E.

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For example, consider that Sidiz.Inc's financial performance has been poor lately as its earnings have been in decline. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.

Check out our latest analysis for Sidiz.Inc

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Sidiz.Inc's earnings, revenue and cash flow.

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

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 63%. This means it has also seen a slide in earnings over the longer-term as EPS is down 93% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 22% shows it's an unpleasant look.

In light of this, it's alarming that Sidiz.Inc's P/E sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. 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 Final Word

The strong share price surge has got Sidiz.Inc's P/E rushing to great heights as well. 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 Sidiz.Inc currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

You always need to take note of risks, for example - Sidiz.Inc has 3 warning signs we think you should be aware of.

Of course, you might also be able to find a better stock than Sidiz.Inc. 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.