PN Poong Nyun Co., Ltd.'s (KOSDAQ:024940) 29% Share Price Plunge Could Signal Some Risk

The PN Poong Nyun Co., Ltd. (KOSDAQ:024940) share price has softened a substantial 29% over the previous 30 days, handing back much of the gains the stock has made lately. Longer-term shareholders would now have taken a real hit with the stock declining 5.0% in the last year.

In spite of the heavy fall in price, given close to half the companies in Korea have price-to-earnings ratios (or "P/E's") below 11x, you may still consider PN Poong Nyun as a stock to avoid entirely with its 44.7x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

As an illustration, earnings have deteriorated at PN Poong Nyun 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. If not, then existing shareholders may be quite nervous about the viability of the share price.

See our latest analysis for PN Poong Nyun

Although there are no analyst estimates available for PN Poong Nyun, take a look at this free data-rich visualisation to see how the company stacks up on 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 PN Poong Nyun's to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 23%. 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 28% in total. So we can start by confirming that the company has generally done a good job of growing earnings over that time, even though it had some hiccups along the way.

This is in contrast to the rest of the market, which is expected to grow by 33% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's alarming that PN Poong Nyun's P/E sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Final Word

A significant share price dive has done very little to deflate PN Poong Nyun's very lofty P/E. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that PN Poong Nyun currently trades on a much higher than expected P/E since its recent three-year growth is lower than the wider market forecast. Right now we are increasingly uncomfortable with the high P/E as this earnings performance isn't likely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

And what about other risks? Every company has them, and we've spotted 3 warning signs for PN Poong Nyun (of which 2 make us uncomfortable!) you should know about.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.